A company has a standard cost system in which fixed and variable manufacturing overhead costs are applied to products on the basis of direct labor-hours.The company's choice of the denominator level of activity affects the Fixed component of the predetermined overhead rate.

Question

Quizplus · Accepted Answer

The denominator level of activity (usually direct labor-hours or machine-hours) affects the Fixed component of the predetermined overhead rate since fixed overhead costs are expected to remain relatively constant regardless of the level of production activity. Therefore, the higher the denominator level of activity, the lower the fixed overhead cost per unit of the activity measure, resulting in a lower predetermined overhead rate. Conversely, the lower the denominator level of activity, the higher the fixed overhead cost per unit, resulting in a higher predetermined overhead rate.

A Company Has a Standard Cost System in Which Fixed