In a standard cost system, overhead is applied to production on the basis of:
A)the denominator hours chosen for the period.
B)the actual hours required to complete the actual output of the period.
C)the standard hours allowed to complete the actual output of the period.
D)the actual cost of fixed overhead during the period.

Question

Quizplus · Accepted Answer

In a standard cost system, overhead is applied to production based on the standard hours allowed to complete actual output of the period, which is also known as predetermined overhead rate. This rate is calculated by dividing the estimated overhead cost by the estimated activity level or standard hours allowed for the period. This approach helps in controlling and evaluating the efficiency of the production process, as the actual overhead costs are compared to the standard overhead costs. Using denominator hours is also a common practice, but it is not the best choice, as it may cause over- or under-application of overhead costs, depending on the actual activity level. Actual hours required and actual cost of fixed overhead are also not appropriate bases for applying overhead in a standard cost system, as they do not reflect the expected or normal level of production activity.

In a Standard Cost System, Overhead Is Applied to Production