If the budgeted cost in the indirect cost pool is $144500 and the total cost allocation base is $165500, the budgeted indirect cost rate is __________?
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Answer: B. 87.31%
Explanation
The budgeted indirect cost rate is calculated by dividing the budgeted cost in the indirect cost pool by the total cost allocation base. Dividing the indirect cost pool of 144500 by the allocation base of 165500 results in 87.31 percent. Standard cost allocation principles confirm that dividing pool costs by the base yields the correct budgeted rate. Budgeted indirect cost rates are established before the accounting period begins to facilitate timely job costing. Indirect costs cannot be traced directly to specific products, requiring allocation bases like labor hours. Using predetermined rates prevents seasonal fluctuations in overhead from distorting monthly product costs.
Manufacturing and service firms use budgeted indirect rates to bid on contracts and price products competitively. Comparing budgeted rates to actual rates at year-end helps accountants determine under- or over-allocation. Accurate indirect cost allocation ensures that financial reports comply with standard accounting regulations. Incorrect options represent arithmetic calculation errors or inverted division of the given financial figures. Other choices display percentage calculation mistakes or confuse indirect cost pools with direct expenses. Selecting wrong numbers demonstrates unfamiliarity with overhead rate computation procedures.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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