The formula for calculating the amount of applied overhead to a product is:
A) Predetermined overhead rate ´ Estimated units of cost driver
B) Predetermined overhead rate ´ Actual overhead costs
C) Predetermined overhead rate ´ Actual units of cost driver
D) Predetermined overhead rate ´ Estimated overhead costs

Question

Quizplus · Accepted Answer

The amount of applied overhead to a product is calculated by multiplying the predetermined overhead rate by the actual units of the cost driver. This is because overhead costs are typically driven by a variable such as machine hours or labor hours, so the actual usage of these cost drivers is a good indicator of the actual overhead costs incurred. Option A uses estimated units of the cost driver, while option B uses actual overhead costs (not units of the cost driver) and option D uses estimated overhead costs (not predetermined overhead rate multiplied by a cost driver).

The Formula for Calculating the Amount of Applied Overhead to a Product