Question

Inez has the following information relating to Job AA5. Direct material cost was $200,000, direct labor was $36,550, and overhead applied on the basis of direct labor hours was $73,100. What was the predetermined overhead rate using the labor rate of $17 per hour

Answer 1

$34 per hour was the predetermined overhead rate using the labor rate of $17 per hour.

Direct labor hours:

= Labor cost ÷ Rate per hour

= $36,550 ÷ $17

= 2,150 Direct labor hours

Predetermined overhead rate :

= Overhead applied on the basis of direct labor hour ÷ Number of hours

= $73,100 ÷ 2,150 hrs

= $34 per hour

What is Predetermined overhead rate ?

• The amount of the overall manufacturing overhead cost that will be allocated to each unit of product created is calculated using a predefined overhead rate, sometimes referred to as a plant-wide overhead rate.
• The rate is calculated by dividing the projected number of direct work hours by the fixed overhead cost.
• New product pricing and fluctuations in overhead expenses are computed using the specified overhead rate.
• For actual results compared to budgeted or predicted results, variances can be determined.
• Given that the rate is based on projections rather than real facts, there are worries that it may not be reliable.
• Additionally, previous data may not be a good indicator of future overhead expenses due to shifts in industry patterns and prices.

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