Companies use a predetermined overhead rate rather than an actual overhead rate because:

• A. It ensures that overhead costs are never overapplied or underapplied.
• B. Predetermined rates eliminate the need for estimating overhead costs.
• C. It allows overhead costs to be assigned to products more promptly during the period.
• D. Actual overhead rates are always lower than predetermined rates.

Answer: (C)

Verified step by step guidance

1. Understand the concept of overhead costs: Overhead costs are indirect costs that cannot be directly traced to a specific product or service, such as factory rent, utilities, or salaries of supervisors.
2. Learn the purpose of a predetermined overhead rate: Companies use a predetermined overhead rate to allocate overhead costs to products or services more promptly during the accounting period, rather than waiting until the end of the period to calculate actual overhead costs.
3. Recognize the formula for predetermined overhead rate: The predetermined overhead rate is calculated using the formula: $\frac{\mathrm{Estimated} \mathrm{Overhead} \mathrm{Costs}}{\mathrm{Estimated} \mathrm{Activity} \mathrm{Base}}$. The activity base could be direct labor hours, machine hours, or any other cost driver.
4. Understand why actual overhead rates are not used during the period: Actual overhead rates are calculated at the end of the period when all costs are known. Using actual rates during the period would delay cost allocation and decision-making, which is impractical for timely financial reporting and operational decisions.
5. Recognize the benefits of using predetermined overhead rates: Predetermined rates allow companies to assign overhead costs to products or services promptly, facilitating better cost control, pricing decisions, and financial reporting during the period.