Predetermined Rates in Absorption Costing

Steps:

• Absorption costing allocates overheads using rates set in advance for efficiency.
• These rates rely on estimates to apply costs to products before actual data is available.
• Budgeted costs (numerator) and budgeted outputs (denominator) form the basis for the rate.
• Actual costs are reconciled later via under/over absorption, not by altering the rate.

Why A is correct:

• Predetermined absorption rates are defined as budgeted overhead costs divided by budgeted activity levels, ensuring timely product costing.

Why the others are wrong:

• B: Rates are set before actuals to avoid delays in costing; actuals adjust absorption variance.
• C: Rates remain fixed for the budget period to provide cost stability, not frequent changes.
• D: Rates are typically set annually or per budget cycle, not mandatorily for multiple years.

Final answer: A