LO 6.3Which is the correct formula for computing the overhead rate?

estimated use of the cost driver for production/estimated overhead for the activity
estimated overhead for the product/estimated use of the cost driver for the activity
estimated use of the cost driver for production/estimated overhead for the activity
estimated overhead for the activity/estimated use of the cost driver for the activity

Question

08-01-2020
Business

contestada

LO 6.3Which is the correct formula for computing the overhead rate?

estimated use of the cost driver for production/estimated overhead for the activity
estimated overhead for the product/estimated use of the cost driver for the activity
estimated use of the cost driver for production/estimated overhead for the activity
estimated overhead for the activity/estimated use of the cost driver for the activity

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andromache andromache · Answer 1 · 2020-01-09T12:35:05+01:00

Answer:

estimated overhead for the activity/estimated use of the cost driver for the activity

Explanation:

In case of the activity-based costing, the formula to compute the overhead rate is shown below:

Overhead rate = (Estimated overhead for the activity) ÷ (Estimated use of the cost driver for the activity)

The cost driver can be in machine hours, direct labor hours, etc and the overhead cost for the activity includes machine setup cost, machine running cost, etc

We simply divide the estimated overhead for the activity by the estimated use of the cost driver for the activity so the estimated overhead rate can arrive.

We considered the estimated overhead for the activity instead of the estimated overhead for the product