What is the role of an overhead rate in allocating indirect costs?

What is the role of an overhead rate in allocating indirect costs?

• A. An overhead rate is applied to a chosen base to allocate indirect costs.
• B. An overhead rate is used to increase profits.
• C. Overhead rate eliminates direct costs.
• D. Overhead rate has no effect.

Answer: (A)

An overhead rate serves as a bridge to allocate indirect costs to cost objects by tying those costs to a chosen base of activity. You pool all indirect costs into an overhead amount, pick a base that reflects how those costs are consumed (like direct labor hours or machine hours), and compute the rate by dividing the estimated overhead by the estimated base. Then you apply that rate to the actual amount of base used by each product or job to assign its share of indirect costs. For example, if overhead is estimated at $100,000 and the base is 10,000 direct labor hours, the rate is $10 per hour. A job using 40 direct labor hours would be charged $400 in overhead. This is why the overhead rate is used to allocate indirect costs.

An overhead rate serves as a bridge to allocate indirect costs to cost objects by tying those costs to a chosen base of activity. You pool all indirect costs into an overhead amount, pick a base that reflects how those costs are consumed (like direct labor hours or machine hours), and compute the rate by dividing the estimated overhead by the estimated base. Then you apply that rate to the actual amount of base used by each product or job to assign its share of indirect costs. For example, if overhead is estimated at $100,000 and the base is 10,000 direct labor hours, the rate is $10 per hour. A job using 40 direct labor hours would be charged $400 in overhead. This is why the overhead rate is used to allocate indirect costs.