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1- I am struggling with a basic concept.why do we need to have a overhead rate ?
2nd Why can’t we use actual overheads and actual activity instead of budgeted…
Let’s say you are dealing with y/e 31/12/2016.
You will be making inventory in January 2016 and will need to know what it costs, including its fixed production overhead content. You can’t wait until 31/12/2016 to find out what actual costs and production volumes are, so you use budgeted costs and output.
You might try using actual costs and production for Jan, Feb etc, and calculate actual overheads for each month – but that would be an awful lot of work and you still would not know what production in the first week in January costs before you get to the end of January.
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