How is overhead allocated to jobs using a predetermined rate?

• A. Actual overhead / actual activity.
• B. Estimated overhead / estimated allocation base.
• C. Applied overhead = rate × actual activity.
• D. Applied overhead is not allocated to jobs.

Answer: (C)

Using a predetermined rate means you set a rate before the period based on estimated overhead and estimated activity, then apply that rate to each job using the actual level of activity the job required. The amount allocated to a job is the predetermined rate multiplied by the actual activity (for example, actual direct labor hours or actual machine hours). This approach provides a consistent method for spreading overhead across jobs and avoids waiting for actual overhead to be known. It also helps smooth costs and supports budgeting and decision-making.

The idea here isn’t just computing a rate from estimates, but applying that rate to actual activity to determine how much overhead to assign to each job. Using actual overhead divided by actual activity would be a different approach (actual costing), and using only the estimated figures without applying them to actual activity wouldn’t allocate overhead to specific jobs.