The denominator in an overhead allocation rate for normal costing is:
A) Actual overhead costs
B) Estimated activity level
C) Estimated overhead costs
D) Actual activity level

Question

Quizplus · Accepted Answer

The denominator in an overhead allocation rate for normal costing is the estimated activity level. This is because normal costing relies on predetermined overhead rates based on estimated activity levels (e.g. direct labor hours or machine hours). Actual overhead costs and actual activity levels are not used in the initial calculation of the overhead allocation rate, although they may be compared to the estimated amounts for analysis and adjustment purposes. Estimated overhead costs are not used in the denominator, but rather in the numerator of the overhead allocation rate calculation.

The Denominator in an Overhead Allocation Rate for Normal Costing