Final answer:
The predetermined overhead rate is determined by dividing estimated manufacturing overhead cost by estimated units in the allocation base, demonstrating the concept of spreading the overhead across more units to reduce the cost per unit.
Step-by-step explanation:
The predetermined overhead rate is calculated using the formula Estimated manufacturing overhead cost divided by estimated units in the allocation base (D). This rate is used to allocate overhead costs to products or job orders based on a consistent activity measure. This method helps in setting product prices and budgeting. Assuming a fixed cost of $1,000 for overhead, the average fixed cost decreases as the quantity of output increases.
This is a visual representation of spreading the overhead, which refers to the idea that the more units produced, the lower the fixed cost allocated to each unit, resulting in a hyperbolic shape for the average fixed cost curve. The formula used to calculate predetermined overhead rate is (D) Estimated manufacturing overhead cost/estimated units in the allocation base. This formula helps businesses estimate the manufacturing overhead cost per unit of production based on the total estimated manufacturing overhead cost and the estimated units in the allocation base.