Final answer:
Overhead in a system with multiple predetermined rates is applied in each department as jobs proceed through it, allowing for more accurate costing based on the actual activities in different departments.
Step-by-step explanation:
In a system that uses multiple predetermined overhead rates, overhead is applied in each department as jobs proceed through the department. This approach allows for more accurate costing of jobs by assigning overhead costs more directly based on the actual activities occurring in each department. This system contrasts with traditional overhead application methods that might apply overhead at the end of each period or use a single overhead rate for the entire production process.
Companies choose to use multiple predetermined overhead rates when they have diverse operations across different departments, which can cause significant variations in overhead costs. For instance, the machining department may incur different overhead costs compared to the assembly department. Therefore, applying overhead rates that reflect these differences enables a business to allocate overhead more accurately.
The system works by first establishing overhead rates for each department based on the expected costs and activities for the period. As products or jobs move through departments, the respective overhead rates are applied to the jobs based on the actual departmental activities they undergo. The end result is meant to reflect the true cost of producing each product more closely than a one-size-fits-all rate would.