What Is the Rationale Behind Applying Overhead at an Estimated

question 11

Multiple Choice

What is the rationale behind applying overhead at an estimated rate rather than an actual rate such as direct labour or materials?

• A)Accounting rules permit this approach.
• B)Waiting to the end of an accounting period to allocate costs is inefficient.
• C)Overhead costs fluctuate widely month to month and these fluctuations can distort profitability.
• D)Overhead costs are incurred evenly month to month as they include mostly fixed costs.

---

Definitions:

Simple Rate Of Return

A calculation used to evaluate the profitability of an investment, determined by dividing the annual incremental net operating income by the initial investment cost.

Salvage Value

The expected residual worth of an asset upon the conclusion of its effective lifespan.

Net Income

The total profit of a company after all expenses and taxes have been deducted from total revenue.

Incremental Cost Approach

Refers to the analysis of the additional costs that are incurred when making business decisions, focusing on the costs that change with the level of activity.