At the beginning of a year, a company predicts total direct materials costs of $900,000 and total overhead costs of $1,170,000. If the company uses direct materials costs as its activity base to allocate overhead, what is the predetermined overhead rate it should use during the year?

Question

Business

Naomi Lowery

28 August, 02:58

At the beginning of a year, a company predicts total direct materials costs of $900,000 and total overhead costs of $1,170,000. If the company uses direct materials costs as its activity base to allocate overhead, what is the predetermined overhead rate it should use during the year?

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Answers (1)

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Briley · Answer 1

1.30

Explanation:

The cost of production is usually split into direct and indirect cost or overheads. the overheads is usually stated as a function of the direct cost (labour, machine hours, materials etc.)

The predetermined overhead rate

= $1,170,000/$900,000

= 1.3

This means that the company will incur an overhead cost of $1.30 for every $1 spent on direct materials.