(Appendix 4B)If predetermined overhead rates are based on budgeted activity and overhead includes significant fixed costs, then the unit product costs will be stable regardless of the budgeted level of activity for the period.

Question

Quizplus · Accepted Answer

If overhead includes significant fixed costs, then the unit product costs will not be stable regardless of the budgeted level of activity for the period. As activity levels increase, the fixed costs will be spread over more units, resulting in a decrease in per-unit fixed cost and a decrease in unit product cost. Therefore, the unit product cost will vary with changes in activity level.

(Appendix 4B)If Predetermined Overhead Rates Are Based on Budgeted Activity