Which formula is used to calculate the overhead absorption rate?

The overhead absorption rate is calculated by dividing the total production overhead costs by the expected activity level (usually measured in machine hours or labor hours). This formula helps businesses determine how much overhead cost should be applied to each unit of production, thus facilitating better cost control and pricing strategies. By selecting option B, you are identifying the correct approach which reflects the standard calculation method used in costing.

In this context, the production overhead represents the total fixed and variable costs that will be incurred in the production process, while the activity level indicates the expected output or input that allows these costs to be allocated proportionally. This calculation is crucial for accurate financial reporting and decision-making within a company.