How is overhead absorbed calculated?

How is overhead absorbed calculated?

• A. Actual overhead multiplied by OAR
• B. Actual activity times predetermined OAR
• C. Budgeted activity times actual OAR
• D. Predetermined overhead divided by actual activity

Answer: (B)

Overhead absorption uses a rate applied per unit of activity to allocate overhead to production. The rate is typically fixed in advance as a predetermined overhead rate, calculated from budgeted overhead and budgeted activity. To determine how much overhead is actually absorbed into production in the period, you multiply this predetermined rate by the actual level of activity that occurred. This yields the overhead cost charged to products for the period. So, overhead absorbed = actual activity × predetermined overhead absorption rate. Using actual overhead costs × the rate would mix spending with allocation and isn’t how absorption works. Applying the rate to budgeted activity treats the period as if it produced the budgeted level, which can misstate costs if activity differed. Dividing the predetermined overhead by actual activity would give the rate itself, not the absorbed amount.

Overhead absorption uses a rate applied per unit of activity to allocate overhead to production. The rate is typically fixed in advance as a predetermined overhead rate, calculated from budgeted overhead and budgeted activity. To determine how much overhead is actually absorbed into production in the period, you multiply this predetermined rate by the actual level of activity that occurred. This yields the overhead cost charged to products for the period.

So, overhead absorbed = actual activity × predetermined overhead absorption rate.

Using actual overhead costs × the rate would mix spending with allocation and isn’t how absorption works. Applying the rate to budgeted activity treats the period as if it produced the budgeted level, which can misstate costs if activity differed. Dividing the predetermined overhead by actual activity would give the rate itself, not the absorbed amount.