In a perpetual inventory system, overhead may be applied based on which of the following methods?

• A. A predetermined rate using direct labor hours
• B. The ending inventory balance
• C. The total number of units sold during the period
• D. The amount of cash received from customers

Answer: (A)

Verified step by step guidance

1. Understand the concept of overhead application: Overhead refers to indirect costs incurred during production, such as utilities, rent, and depreciation. In accounting, these costs are allocated to products or services using a systematic method.
2. Recognize the role of a predetermined rate: A predetermined overhead rate is calculated before the accounting period begins. It is based on estimated overhead costs and an allocation base, such as direct labor hours, machine hours, or direct labor costs.
3. Identify the allocation base: In this problem, the allocation base mentioned is direct labor hours. This means overhead is applied proportionally to the number of direct labor hours worked during production.
4. Eliminate incorrect options: The ending inventory balance, total number of units sold, and cash received from customers are not standard allocation bases for overhead application. These are unrelated to the systematic allocation of indirect costs.
5. Conclude that the correct method is using a predetermined rate based on direct labor hours, as it aligns with standard accounting practices for overhead allocation in a perpetual inventory system.