The standard overhead applied is based on the ______ level of activity multiplied by the predetermined overhead rate.

The standard overhead applied is based on the ______ level of activity multiplied by the predetermined overhead rate.

• A. actual
• B. budgeted
• C. standard
• D. ideal

Answer: (A)

The main idea is that overhead is allocated to production using a rate that’s fixed in advance, times the actual activity that occurred. The predetermined overhead rate is set at the start of the period based on budgeted overhead and a budgeted activity base. When you apply overhead to products, you multiply that rate by the actual level of activity (for example, actual machine hours or direct labor hours) used in producing the goods. This approach links overhead costs to what actually happened in production, rather than to what was planned. Using a budgeted activity level would smooth costs regardless of real activity and could distort the cost of goods sold, while standard or ideal levels are references for efficiency targets rather than the basis for applying overhead. So, the standard overhead applied is based on the actual level of activity multiplied by the predetermined overhead rate.

The main idea is that overhead is allocated to production using a rate that’s fixed in advance, times the actual activity that occurred. The predetermined overhead rate is set at the start of the period based on budgeted overhead and a budgeted activity base. When you apply overhead to products, you multiply that rate by the actual level of activity (for example, actual machine hours or direct labor hours) used in producing the goods. This approach links overhead costs to what actually happened in production, rather than to what was planned. Using a budgeted activity level would smooth costs regardless of real activity and could distort the cost of goods sold, while standard or ideal levels are references for efficiency targets rather than the basis for applying overhead. So, the standard overhead applied is based on the actual level of activity multiplied by the predetermined overhead rate.