Predetermined OAR is defined as which of the following?

Predetermined OAR is defined as which of the following?

• A. Budgeted overhead divided by actual activity level
• B. Budgeted overhead divided by budgeted activity level
• C. Actual overhead divided by budgeted activity level
• D. Actual overhead divided by actual activity level

Answer: (B)

Predetermined overhead absorption rate is set in advance using budgeted figures: budgeted overhead divided by budgeted activity level. This creates a fixed rate per unit of the chosen cost driver (like hours or machine units) that is used to apply overhead to products during the period. Using budgeted figures keeps the cost per unit stable and enables timely product costing and planning, rather than waiting for actual costs and activity to be known. If you used actual overhead or actual activity, the rate would fluctuate with the period’s performance, leading to over- or under-absorption and less predictable costing.

Predetermined overhead absorption rate is set in advance using budgeted figures: budgeted overhead divided by budgeted activity level. This creates a fixed rate per unit of the chosen cost driver (like hours or machine units) that is used to apply overhead to products during the period. Using budgeted figures keeps the cost per unit stable and enables timely product costing and planning, rather than waiting for actual costs and activity to be known. If you used actual overhead or actual activity, the rate would fluctuate with the period’s performance, leading to over- or under-absorption and less predictable costing.