OAR is defined as which of the following?

OAR is defined as which of the following?

• A. Actual overhead ÷ Actual activity
• B. Total budgeted overhead ÷ total budgeted activity
• C. Overhead absorbed ÷ Actual activity
• D. Budgeted overhead ÷ Actual activity

Answer: (B)

Overhead absorption rate is the rate used to charge overhead to production based on a budgeted level of activity. It is anchored on planned figures, not on what actually happened, so it stays stable for costing during the period. The correct definition is found by dividing the total budgeted overhead by the total budgeted activity. This gives a budgeted rate per unit of activity which is then applied to actual activity to determine overhead absorbed into production. Why the other ideas aren’t the standard definition: using actual overhead divided by actual activity would give an actual rate, not the budgeted absorption rate used for costing; using overhead absorbed divided by actual activity is a reverse calculation rather than the defining rate; using budgeted overhead divided by actual activity mixes budgeted and actual in a way that isn’t how the rate is defined or used.

Overhead absorption rate is the rate used to charge overhead to production based on a budgeted level of activity. It is anchored on planned figures, not on what actually happened, so it stays stable for costing during the period.

The correct definition is found by dividing the total budgeted overhead by the total budgeted activity. This gives a budgeted rate per unit of activity which is then applied to actual activity to determine overhead absorbed into production.

Why the other ideas aren’t the standard definition: using actual overhead divided by actual activity would give an actual rate, not the budgeted absorption rate used for costing; using overhead absorbed divided by actual activity is a reverse calculation rather than the defining rate; using budgeted overhead divided by actual activity mixes budgeted and actual in a way that isn’t how the rate is defined or used.