Question

1. Why should predetermined overhead rates be used instead of actual rate? Justify your views with logical arguments.

2. Brox Hardly, a management accountant, was faced with an ethical conflict at the office. According

to the Institute of Management Accountants’ Statement of Professional Practice, what should be

the first action Hradly should pursue? Discuss.

Answer 1

Answer-1. Predetermined overhead rates should be used instead of actual rate because:

• A business typically doesn't suffer overhead costs all around the year. For instance, heating costs are more noteworthy during winter months. Still, assigning extra overhead cost to a job created in the winter contrasted with one created in the mid year(summer) may fill no helpful need.
• Overhead costs like factory building depreciation are fixed expenses. In the event that the volume of goods manufactured shifts from month to month, the actual rate changes from month to month, despite the fact that the total cost is consistent from month to month. The predetermined rate, then again, is consistent from month to month.
• Predetermined rates help in estimating job costs sooner. Businesses can allocate overhead costs to manufacturing when they allot direct materials and direct labor costs, utilizing a predetermined rate. Without a predetermined rate, businesses don't have the idea about the costs of manufacturing until the month's end or considerably later when bills show up. Mostly, the electric bill for July will likely not show up until August. In the event that they have utilized actual overhead, the business would not have decided the costs of its July work until August. It is one step ahead to have a decent approximate of costs while accomplishing the work in place of hanging tight quite a while for just a bit more precise numbers.