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Predetermined overhead rates

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Please help answer the following accounting question.

How often should the predetermined overhead rate be reviewed by management for accuracy - monthly, quarterly or annually? Explain.

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Solution Summary

The following discussion tells you why these rates should not be revised mid-year and gives examples of what might happen if you did. Your response is 347 words in everyday language suitable for novice. Calculations are included in the solution.

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Problem: How often should the predetermined overhead rate be reviewed by management for accuracy - monthly, quarterly or annually?

Solution:
Predetermined overhead rates should not be re-figured more often than annually. One of the purposes of a predetermined overhead rates is to "normalize" overhead rates throughout the fluctuations over a full year.

Fluctuations over the course of a year can happen from seasonal activity. The predetermined overhead rate, by using annual activity, rather than monthly or quarterly activity, spreads overhead to all units in the ...

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