Answer (C) is correct . The most important factor in budgeting manufacturing overhead is production volume. Many overhead items have variable costs, and those that are fixed with a relevant range of output may increase if production exceeds that range. The other essential consideration is management’s judgment with respect to the nature and amount of costs to be incurred and expectations for production volume. Because overhead is applied based on predetermined rates, accurate judgment is important.
Answer (A) is incorrect because Machine hours may not be the appropriate activity base. Moreover, some overhead is fixed regardless of the activity base.
Answer (B) is incorrect because The contribution margin can be calculated only after variable costs and sales prices are determined. Some overhead is variable.
Answer (D) is incorrect because Sales volume (or dollars) is less significant because overhead is based on production volume.
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