How do you allocate fixed overhead under normal costing?

How do you allocate fixed overhead under normal costing?

• A. Allocate using actual overhead incurred without any rate.
• B. Allocate based on a fixed rate for all products.
• C. Allocate using a predetermined overhead rate based on an allocation base and then adjust variances.
• D. Do not allocate fixed overhead to products.

Answer: (C)

Under normal costing, fixed overhead is allocated to products using a predetermined overhead rate based on an allocation base (such as direct labor hours or machine hours). You estimate total fixed overhead for the period and the level of activity to set the rate before the period starts, apply that rate to each product as it uses the allocation base, and then at period end compare the actual fixed overhead to the amount allocated. Any difference—an overhead variance—is analyzed and closed to reflect what actually occurred. This approach provides a stable, timely method for assigning costs to products while still capturing the discrepancy between estimated and actual overhead. It wouldn’t be correct to allocate using actual overhead with no rate, because that would be actual costing and late in the period. Using a single fixed rate for all products ignores the cost driver differences between products, leading to distorted costs. And not allocating fixed overhead at all would leave product costs incomplete.

Under normal costing, fixed overhead is allocated to products using a predetermined overhead rate based on an allocation base (such as direct labor hours or machine hours). You estimate total fixed overhead for the period and the level of activity to set the rate before the period starts, apply that rate to each product as it uses the allocation base, and then at period end compare the actual fixed overhead to the amount allocated. Any difference—an overhead variance—is analyzed and closed to reflect what actually occurred.

This approach provides a stable, timely method for assigning costs to products while still capturing the discrepancy between estimated and actual overhead. It wouldn’t be correct to allocate using actual overhead with no rate, because that would be actual costing and late in the period. Using a single fixed rate for all products ignores the cost driver differences between products, leading to distorted costs. And not allocating fixed overhead at all would leave product costs incomplete.