Lecture Managerial accounting for managers (4e) - Appendix 4A: The predetermined overhead rate and capacity. After studying chapter Appendix 10A, you should be able to compute and interpret the fixed overhead budget and volume variances. | The Predetermined Overhead Rate and Capacity Appendix 4A Appendix 4A: The Predetermined Overhead Rate and Capacity. Learning Objective 4-7 Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period. Learning objective 4-7 is to understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period. Predetermined Overhead Rate and Capacity Calculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because: Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity levels. Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use. There are two major criticisms of calculating the predetermined overhead rate based on estimated amounts. The first is . | The Predetermined Overhead Rate and Capacity Appendix 4A Appendix 4A: The Predetermined Overhead Rate and Capacity. Learning Objective 4-7 Understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period. Learning objective 4-7 is to understand the implications of basing the predetermined overhead rate on activity at capacity rather than on estimated activity for the period. Predetermined Overhead Rate and Capacity Calculating predetermined overhead rates using an estimated, or budgeted amount of the allocation base has been criticized because: Basing the predetermined overhead rate upon budgeted activity results in product costs that fluctuate depending upon the activity levels. Calculating predetermined rates based upon budgeted activity charges products for costs that they do not use. There are two major criticisms of calculating the predetermined overhead rate based on estimated amounts. The first is that the predetermined rate creates problems when actual levels of activity are different from estimated, or budgeted, amounts. The second is that in some cases basing the predetermined overhead rate on estimated amounts charges products for costs that they do not use. Capacity-Based Overhead Rates Criticisms can be overcome by using estimated total units in the allocation base at capacity in the denominator of the predetermined overhead rate calculation. Let’s look at the difference! We can minimize the criticisms by basing estimated total units in the allocation base at capacity levels of activity (rather than the estimated total units in the allocation base, in the denominator). Capacity-Based Overhead Rates: An Example Equipment is leased for $100,000 per year. Running at full capacity, 50,000 units may be produced. The company estimates that 40,000 units will be produced and sold next year. What is the predetermined overhead rate? Here is a simple example where a company leases a .
