The fixed portion of the predetermined overhead rate is used for product costing purposes and has no significance in terms of cost control.

Question

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The fixed portion of the predetermined overhead rate is based on estimated overhead costs that cannot be easily influenced or controlled by management. Therefore, it is mainly used for allocating overhead costs to products and determining their total cost. However, the variable portion of the predetermined overhead rate is based on actual volume-based activity levels, which can be controlled and managed by management. Therefore, it is more relevant for cost control purposes, such as identifying cost drivers, reducing waste, and improving efficiency.

The Fixed Portion of the Predetermined Overhead Rate Is Used