Question

What are the steps in developing a budgeted fixed OH rate?

A) Estimate the total fixed OH costs for the upcoming period and determine the expected level of activity.
B) Determine the budgeted machine hours for the upcoming period.
C) Divide the estimated total fixed OH costs by the budgeted machine hours to calculate the budgeted fixed OH rate.
D) All of the above.

Answer 1

To develop a budgeted fixed OH rate, estimate the total fixed overhead costs for the period, determine the expected level of activity, and then divide the costs by this activity level to calculate the rate.

Step-by-step explanation:

The steps in developing a budgeted fixed overhead (OH) rate involve a combination of estimating costs and calculating rates based on expected activity levels. The direct answer to the question is D) All of the above. Here are the detailed steps:

1. Estimate the total fixed OH costs for the upcoming period.
2. Determine the expected activity level, which could be in terms of budgeted machine hours or another measure such as labor hours.
3. Divide the estimated total fixed OH costs by the expected level of activity to calculate the budgeted fixed OH rate.

In the context of the provided information, total costs at 'The Clip Joint' are calculated by adding the fixed costs of $160 per day to the variable costs, which are dependent on the number of barbers hired (at $80 per barber per day). This barbershop example helps to illustrate how fixed and variable costs contribute to the total costs, which is a fundamental concept in developing a budgeted fixed OH rate for a business.