Question

Birdstock establishes a static budget at the beginning of each year. Birdstock uses machine hours to allocate fixed overhead. Based on the static budget, the budgeted fixed overhead for the year totaled $1,644,000 and the budgeted machine hours totaled 411,000. For May, the actual fixed overhead was $150,000 and the actual machine hours were 15,000. What is the rate that Birdstock will use to apply overhead in May?

Select one:

a. $109.60 per machine hour

b. $4.00 per machine hour

c. None of the choices are correct.

d. $10.00 per machine hour

e. $0.25 per machine hour

Answer 1

Overhead absroption rate = Total Budgeted expense / Total Budgeted machine hour

Absorption rate = $ 1,644,000/ 411000 = $4 per Machine hour.      

Overhead absorption is the amount of indirect costs assigned to cost objects. Indirect costs are costs that are not directly traceable to an activity or product. Cost objects are items for which costs are compiled, such as products, product lines, customers, retail stores, and distribution channels. Overhead absorption is a necessary part of the requirement by both the GAAP and IFRS accounting frameworks to include overhead costs in the recorded amount of inventory that is shown in a company's financial statements. Overhead absorption is not needed for internal management reporting, only for external financial reporting. Examples of indirect costs are:

• Selling and marketing costs

• Administrative costs

• Production costs