The Basic Cost Flow Model Applies Only to Physical Units
The basic cost flow model applies only to physical units and not to costs.This inventory equation applies to both physical units and the costs associated with the physical units.
If the Beginning Balance (BB)equals the Ending Balance (EB),then the Transfers In (TI)equal the Transfers Out (TO).No change in the beginning and ending inventory balances,so the outputs (TO)will equal the inputs (TI).
The predetermined overhead rate is calculated by dividing the prior period's overhead cost by the prior period's allocation base (i.e. ,activity level).The formula uses the current period or a future period for both overhead and activity level.Absent this,historic relationship can be used.
Overestimating a period's allocation base will understate the predetermined overhead rate.The denominator of the rate will be too high,causing the rate to be too low.