Concept explainers
Concept introduction:
Traditional costing systems use predetermined overhead allocation rate which us based on the volume, for example, number of units, machine hours etc.. Hence, traditional costing systems use volume based allocation measures.
Predetermined Overhead allocation rate:
The Predetermined Overhead allocation rate is used to allocate the manufacturing overhead over the jobs. Predetermined Overhead allocation rate is calculated by dividing the Total Estimated overhead cost by the Total Estimated allocation base.
The formula to calculate the Predetermined Overhead allocation rate is as follows:
To indicate:
The potential negative consequences of traditional volume based costing system
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