Predetermined Overhead Absorption Rate

Steps:

• Determine total budgeted overhead costs for the period.
• Estimate budgeted machine hours for the same period.
• Divide budgeted overheads by budgeted machine hours to get the rate per hour.
• Apply this fixed rate to actual machine hours for product costing.

Why D is correct:

• Overhead absorption rate is a predetermined rate calculated using budgeted overheads divided by budgeted machine hours, as per standard costing principles, to provide stable and consistent cost allocation.

Why the others are wrong:

• A: Uses actual overheads, causing rates to fluctuate with real costs and not serving as a predetermined rate.
• B: Mixes actual overheads with budgeted hours, leading to inaccurate variance analysis.
• C: Mixes budgeted overheads with actual hours, distorting cost absorption during the period.

Final answer: D