Predetermined absorption rates is where, the absorption rate calculated in advance using estimates for cost and production volume in the annual financial plan or budget.

Related MCQs

• Overheads are usually added to cost units using a predetermined overhead absorption rate, which is calculated using figures from the budget.
• Which of the following procedure is incorrect for attributing overhead costs to cost units? I. Collecting production overhead costs by item II. Establishing cost centres III. Allocating and apportioning overhead costs to cost centres IV. Apportioning service cost centre costs to production cost centres V. Absorbing production cost centre costs into cost units
• Under or over absorption is caused by the actual fixed overhead and production volume being different from those figures used to calculate the predetermined rate.
• Indirect production costs are incurred in three main ways: • Production activities: costs arising in production departments such as fuel, depreciation, supervision • Service activities: the cost of operating non-producing departments such as materials handling, canteen • Establishment costs: general production overheads such as factory rent/rates, heating and lighting
• The absorption rate may be calculated by the fraction: • Total overhead costs • Total of absorption basis.
• Variable overhead is overhead that increases as more production work is done. Total variable overhead expenditure therefore depends on the volume of production. Variable overhead is usually calculated as an amount for each direct labour hour worked.
• A predetermined overhead absorption rate is also known as:
• A blanket overhead absorption rate is an absorption rate used throughout a factory and for all jobs and units of output irrespective of the department in which they were produced.
• It is possible to add non-production overheads to the full production cost of units produced and sold (i.e. No cost will be carried forward to the next period in the form of closing stock), to obtain a full cost of sale.
• Allocation is where overheads are allocated to cost centres. If a cost centre is responsible for the entire cost of an item of expenditure, the entire cost is charged directly to the cost centre.