Norwood Corporation uses a predetermined overhead rate of $20 per machine hour.In deriving this ﬁgure, the company's accountant used:
A)a denominator of budgeted machine hours for the current accounting period.
B)a denominator of actual machine hours for the current accounting period.
C)a denominator of actual machine hours for the previous accounting period.
D)a numerator of budgeted machine hours for the current accounting period.
E)a numerator of actual machine hours for the current accounting period.

Question

Quizplus · Accepted Answer

The predetermined overhead rate is calculated using the budgeted amount of machine hours for the current accounting period as the denominator. This is because the purpose of the predetermined overhead rate is to estimate the amount of overhead that will be incurred based on the projected level of production activity (i.e. machine hours). Using actual machine hours for the current or previous accounting period would not be an accurate reflection of the expected level of production activity for the current accounting period. Using the budgeted amount of machine hours is more appropriate as it reflects the expected level of activity for the period for which the predetermined overhead rate is being established.

Norwood Corporation Uses a Predetermined Overhead Rate of $20 Per