Question

Two reasons for using an annual period to compute budgeted indirect cost rates are: a. The numerator reason–the longer the time period, the less the influence of seasonal patterns in indirect (overhead) costs, and b. The denominator reason–the longer the time period, the less the effect of variations in output levels or quantities of the cost-allocation bases on the allocation of fixed costs. What are the two reasons for using an annual period to compute budgeted indirect cost rates?

1) The longer the time period, the less the influence of seasonal patterns in indirect (overhead) costs
2) The longer the time period, the less the effect of variations in output levels or quantities of the cost-allocation bases on the allocation of fixed costs
3) The shorter the time period, the more the influence of seasonal patterns in indirect (overhead) costs
4) The shorter the time period, the more the effect of variations in output levels or quantities of the cost-allocation bases on the allocation of fixed costs

Answer 1

The two reasons for using an annual period to compute budgeted indirect cost rates are the influence of seasonal patterns and the effect of variations in output levels on fixed costs.

Step-by-step explanation:

The two reasons for using an annual period to compute budgeted indirect cost rates are:

1. The longer the time period, the less the influence of seasonal patterns in indirect (overhead) costs. For example, if we calculate the rates on a monthly basis, we may observe higher costs during certain months due to seasonal factors.
2. However, by using an annual period, these seasonal patterns will be smoothed out and provide a more accurate representation of the average costs.
3. The longer the time period, the less the effect of variations in output levels or quantities of the cost-allocation bases on the allocation of fixed costs.
4. For instance, if we calculate the rates on a shorter time period, such as a quarter, any fluctuations in production levels would result in a higher or lower allocation of fixed costs. By using an annual period, these variations in output levels will have less impact on the allocation of fixed costs.