An estimated fixed overhead allocation rate
A) Is unrealistically large if determined using theoretical capacity
B) Can be considered an estimated cost of capacity per unit
C) Is usually based on theoretical capacity
D) Does not provide information about opportunity costs of unused capacity

Question

Quizplus · Accepted Answer

An estimated fixed overhead allocation rate can be considered an estimated cost of capacity per unit because it represents the cost of the fixed overhead needed to produce each unit of product. Option A is incorrect because using theoretical capacity to determine the overhead allocation rate may result in an unrealistic allocation rate. Option C is partially correct, but not all companies use theoretical capacity as the basis for their overhead allocation rate. Option D is incorrect because the estimated fixed overhead allocation rate does provide information about opportunity costs of unused capacity.

An Estimated Fixed Overhead Allocation Rate