Blue Bull Inc.uses direct labor hours to allocate variable and fixed overhead costs.Under which of the following circumstances would the base used to calculate the variable overhead rate be the same as that used for the fixed overhead rate?
A)When actual labor hours are the same as budgeted labor hours
B)When standard indirect labor hours agree with standard direct labor hours
C)In all circumstances the base used for each calculation is the same
D)When the number of labor hours expected to be incurred for the period is the same as normal capacity direct labor hours

Question

Quizplus · Accepted Answer

The base used to calculate the variable overhead rate will be the same as that used for the fixed overhead rate when the number of labor hours expected to be incurred for the period is the same as normal capacity direct labor hours. This is because both fixed and variable overhead costs will be traditionally calculated based on the direct labor hours with an assumption that the level of activity (direct labor hours) will be equal to the normal capacity hours which are planned for the relevant period. Hence, D is the correct answer.