9: D.3. Overhead Costs and Allocation

Question 1

What are the two most appropriate factors for budgeting manufacturing overhead expense?

A) Management judgment, sales volume
B) Production volume, Management judgment
C) Sales dollars and production volume
D) Machine hours, and management judgment

Answer 1

B) Production volume, production volume

Production volume: now for the variable cost, it increases with the increase in production, but the fixed overhead increases if the production volume goes beyond the relevant range, because then you may need extra supervision or places, therefore the Production volume is the key estimate for variable and fixed costs

Professional judgment is required because the managers who have the vision for the future and what will happen, and the overhead is influenced by the management decision, like the predetermined overhead rates, which are based on management estimation.