Under normal costing, how is overhead allocated?

Under normal costing, how is overhead allocated?

• A. Based on actual overhead incurred
• B. Based on budgeted overhead divided by actual output
• C. Based on a predetermined overhead rate times an allocation base, with variances adjusted
• D. Not allocated at all

Answer: (C)

Normal costing uses a predetermined overhead rate, based on estimated overhead for the period and an allocation base, to apply overhead to production. This rate is multiplied by the actual amount of the allocation base used (such as direct labor hours or machine hours) to assign overhead to products. Any difference between actual overhead incurred and overhead applied is treated as overhead variances and adjusted (recognized) at period end. This approach provides timely costing without waiting for actual overhead data, while still capturing the cost difference in variances.

Normal costing uses a predetermined overhead rate, based on estimated overhead for the period and an allocation base, to apply overhead to production. This rate is multiplied by the actual amount of the allocation base used (such as direct labor hours or machine hours) to assign overhead to products. Any difference between actual overhead incurred and overhead applied is treated as overhead variances and adjusted (recognized) at period end. This approach provides timely costing without waiting for actual overhead data, while still capturing the cost difference in variances.