A normal cost system assigns overhead to jobs using which of the following methods?

• A. A predetermined overhead rate
• B. Direct labor hours only
• C. Actual overhead costs incurred
• D. Estimated direct material costs

Answer: (A)

Verified step by step guidance

1. Understand the concept of a normal cost system: A normal cost system assigns overhead to jobs based on a predetermined overhead rate rather than actual overhead costs incurred.
2. Recognize the purpose of a predetermined overhead rate: It is used to allocate overhead costs to jobs in a systematic and consistent manner, based on an estimated rate calculated before the accounting period begins.
3. Learn how the predetermined overhead rate is calculated: The formula is: $\frac{\mathrm{Estimated} \mathrm{Overhead} \mathrm{Costs}}{\mathrm{Estimated} \mathrm{Activity} \mathrm{Base}}$. The activity base could be direct labor hours, machine hours, or another cost driver.
4. Evaluate the options provided in the problem: Direct labor hours only, actual overhead costs incurred, and estimated direct material costs. Note that actual overhead costs incurred are not used in a normal cost system, and estimated direct material costs are not typically the basis for overhead allocation.
5. Conclude that the correct method for assigning overhead in a normal cost system is using a predetermined overhead rate, which is based on an estimated activity base such as direct labor hours or machine hours.