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In: Accounting

What factors are the most critical to consider when developing overhead rates?

What factors are the most critical to consider when developing overhead rates?

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Expert Solution

Multiple factors that you can think of is,

1.Understand that you are going to use that rate for multiple reasons such as absorbing OH etc, so if the base of OH rate (that the data itself that is used to calculate the rate is incorrect), you may end uop getting a wrong OH rate or a misleading one.

2.The Cost Driver is incorrect. This may lead to incorrect answers (here we are taling about denominator) i.e If you want to cal Labour rate per hour, you should have ideally divided by No, of Hours, but instead you divided by No.of Working days.

3. Wrong expense classification ; IMagine an expense is wrongly added to a Sum which you used as numerator to calculate the OH rate. So lets say you added few of indirect labour cost to Direct labour, and hence your Estimated Rate will be higher that actual.

4 Seperation of Fixed, Variable and Semivariable cost should be done before you calculate OH rates

*OH(Overheads)

ekkarill92 answered 2 years ago
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