Which statement is false about overhead absorption using the budgeted overhead rate method?

Which statement is false about overhead absorption using the budgeted overhead rate method?

• A. OAR = budgeted overhead ÷ budgeted activity
• B. Absorbed overhead = OAR × actual activity
• C. Compare overhead cost with absorbed overhead
• D. The method cannot be used if actual activity differs from budgeted activity

Answer: (D)

The technique uses a fixed overhead rate derived from budgeted data and applies it to the actual level of activity to absorb overhead into production. The budgeted overhead rate is calculated as budgeted overhead divided by budgeted activity, giving a single rate to apply. The overhead absorbed during a period is this rate multiplied by the actual activity; this determines how much overhead cost is allocated to output. After applying the rate, you compare the overhead cost incurred with the absorbed overhead to see whether you’ve under- or over-absorbed. The statement that cannot be used if actual activity differs is not correct. The method can still be used even when actual activity differs from budgeted activity. Differences between budgeted and actual activity simply lead to under- or over-absorption, which is a common variance you would identify and typically adjust for, or disclose in performance reporting.

The technique uses a fixed overhead rate derived from budgeted data and applies it to the actual level of activity to absorb overhead into production. The budgeted overhead rate is calculated as budgeted overhead divided by budgeted activity, giving a single rate to apply. The overhead absorbed during a period is this rate multiplied by the actual activity; this determines how much overhead cost is allocated to output. After applying the rate, you compare the overhead cost incurred with the absorbed overhead to see whether you’ve under- or over-absorbed.

The statement that cannot be used if actual activity differs is not correct. The method can still be used even when actual activity differs from budgeted activity. Differences between budgeted and actual activity simply lead to under- or over-absorption, which is a common variance you would identify and typically adjust for, or disclose in performance reporting.