Which of the following is Step 1 in computing a standard overhead rate?

Which of the following is Step 1 in computing a standard overhead rate?

• A. Determine an allocation base
• B. Estimate total overhead for the period
• C. Compute the standard cost per unit
• D. Assess the budgeted overhead

Answer: (A)

Choosing the allocation base is the first move because the overhead rate is built around a specific measure of activity. The allocation base is the variable you’ll use to spread overhead costs to products—things like direct labor hours, machine hours, or direct labor cost. Once you fix this base, you have a denominator to express the overhead per unit of activity. After picking the base, you estimate total overhead for the period and then divide that estimate by the chosen base to get the standard overhead rate (for example, $ over direct labor hour). That rate is what you later apply to actual activity to assign overhead. If you don’t start with the allocation base, you can’t meaningfully compute the rate or apply overhead. Estimating total overhead or computing the rate relies on having a defined base, and computing the rate or applying overhead comes after that.

Choosing the allocation base is the first move because the overhead rate is built around a specific measure of activity. The allocation base is the variable you’ll use to spread overhead costs to products—things like direct labor hours, machine hours, or direct labor cost. Once you fix this base, you have a denominator to express the overhead per unit of activity.

After picking the base, you estimate total overhead for the period and then divide that estimate by the chosen base to get the standard overhead rate (for example, $ over direct labor hour). That rate is what you later apply to actual activity to assign overhead.

If you don’t start with the allocation base, you can’t meaningfully compute the rate or apply overhead. Estimating total overhead or computing the rate relies on having a defined base, and computing the rate or applying overhead comes after that.