How is the predetermined overhead allocation rate used by service companies?

Principles of Accounting Volume 2
19th Edition
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax
Chapter5: Process Costing
Section: Chapter Questions
Problem 17Q: How are predetermined overhead rates used in process costing?
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How is the predetermined overhead allocation rate used by service companies?

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Definition:

 

Manufacturing Overheads:

 

Predetermined manufacturing overhead rate is the rate that has been worked out at the time of laying out the budget and the manufacturing overhead is applied using this rate. The predetermined rate and the activity uses is a source document used to assign the manufacturing overhead cost to each job.

 

The predetermined rate is applied to the activity used. Suppose the manufacturing overhead is applied on machine hours the machine hours used for the particular job is multiplied by predetermined rate and this will be the amount assigned to that particular job.

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