In absorption costing, fixed overhead per unit is established by which of the following?

In absorption costing, fixed overhead per unit is established by which of the following?

• A. Actual fixed overhead divided by actual output.
• B. Fixed overhead budget divided by budgeted output.
• C. Budgeted fixed overhead divided by budgeted output.
• D. Fixed overhead absorption rate per unit based on budgeted input.

Answer: (C)

In absorption costing, the fixed overhead per unit is set using planned activity, so the cost allocated to each unit is stable across the period. The rate is calculated from the period’s budgeted figures: total fixed overhead expected for the period divided by the budgeted number of units to be produced. This gives a per-unit amount that you multiply by units produced to absorb fixed overhead into product costs. Using actual fixed overhead divided by actual output would make the rate fluctuate with what actually happens rather than what was planned, which is not how absorption costing is typically set up. The preferred method uses budgeted fixed overhead and budgeted output to reflect the expected level of activity. The idea is to allocate costs based on what was planned, not on what ends up happening.

In absorption costing, the fixed overhead per unit is set using planned activity, so the cost allocated to each unit is stable across the period. The rate is calculated from the period’s budgeted figures: total fixed overhead expected for the period divided by the budgeted number of units to be produced. This gives a per-unit amount that you multiply by units produced to absorb fixed overhead into product costs.

Using actual fixed overhead divided by actual output would make the rate fluctuate with what actually happens rather than what was planned, which is not how absorption costing is typically set up. The preferred method uses budgeted fixed overhead and budgeted output to reflect the expected level of activity. The idea is to allocate costs based on what was planned, not on what ends up happening.