Management uses a(n) ______ budget to establish the standard overhead rate.

Management uses a(n) ______ budget to establish the standard overhead rate.

• A. Flexible
• B. Static
• C. Master
• D. Rolling

Answer: (A)

The standard overhead rate is set from the master budget, which plans the period’s overhead costs at the expected level of activity. You compute the rate by dividing the budgeted overhead by the budgeted activity level shown in that master (static) budget. This creates a fixed per-unit (or per-activity-unit) rate used to apply overhead to products. The flexible budget, by contrast, shows what overhead would be at actual levels of activity and is used mainly for variance analysis after the fact. Rolling budgets are continually updated forecasts and are not the basis for the standard rate.

The standard overhead rate is set from the master budget, which plans the period’s overhead costs at the expected level of activity. You compute the rate by dividing the budgeted overhead by the budgeted activity level shown in that master (static) budget. This creates a fixed per-unit (or per-activity-unit) rate used to apply overhead to products.

The flexible budget, by contrast, shows what overhead would be at actual levels of activity and is used mainly for variance analysis after the fact. Rolling budgets are continually updated forecasts and are not the basis for the standard rate.