Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 26

Some firms pool overhead into a single plantwide overhead pool, while others collect overhead costs into manufacturing departments, each of which has an overhead cost pool and overhead cost application rate. Which approach is likely to provide more accurate cost numbers for cost estimating, pricing, and performance evaluation?

Step 1 of 3

Pre determined overhead Rate:

Pre determined overhead rate refers to the estimated rate used to allocate factory overheads to the specific job. It is known as the pre determined because it is pre determined on the basis of the upcoming period estimated overhead cost and cost drivers.

It is calculated as follows: