Estimated activity base

Definition

An estimated activity base is a measure used to allocate overhead costs to products or job orders. It is determined before the period begins and serves as a basis for calculating the predetermined overhead rate.

5 Must Know Facts For Your Next Test

1. Estimated activity bases can include direct labor hours, machine hours, or any other measure that drives overhead costs.
2. It helps in projecting overhead costs more accurately across different jobs or products.
3. The accuracy of cost allocation depends significantly on selecting an appropriate activity base.
4. Commonly used in job order costing systems to ensure costs are assigned proportionately.
5. A mismatch between estimated and actual activity can lead to over-applied or under-applied overhead.

Review Questions

• What are some examples of estimated activity bases?
• Why is it important to choose an appropriate estimated activity base?
• How does an estimated activity base affect the calculation of the predetermined overhead rate?

Related terms

Predetermined Overhead Rate: A rate calculated at the beginning of a period by dividing estimated total manufacturing overhead costs by the estimated total amount of the activity base.

Over-applied Overhead: Occurs when the allocated overhead cost is higher than the actual incurred overhead cost.

Under-applied Overhead: Occurs when the allocated overhead cost is lower than the actual incurred overhead cost.