Final answer:
The allocation of indirect costs to the WIP account using a predetermined overhead rate is true. This method allows for an efficient and consistent application of manufacturing overhead costs during production and provides a basis for analyzing cost variances at period's end.
Step-by-step explanation:
The statement is true. Allocation of indirect costs to the Work In Progress (WIP) account is indeed based on a predetermined overhead rate (POR), which is used to estimate the manufacturing overhead costs that are attributable to products still in the process of being manufactured. Businesses determine this rate by dividing estimated overhead costs for a period by some measure of activity, such as labor hours or machine hours.
The predetermined overhead rate is beneficial because it allows companies to apply overhead costs to products more efficiently and consistently throughout the accounting period. It also provides a means to compare actual overhead costs to estimated overhead costs facilitating better managerial decision-making. At the end of an accounting period, businesses will perform adjustments to account for any differences between the actual costs incurred and the costs assigned to the WIP using the predetermined overhead rate.
Implementing a POR is critical in job costing and process costing systems, which require allocation of costs that are not directly traceable to a single product or job. In this manner, the indirect costs are systematically applied to different jobs or products, giving a more accurate picture of total manufacturing costs.