Question

Cosi Company uses a job order costing system and allocates its overhead on the basis of direct labor costs. Cosi expects to incur $810,000 of overhead during the next period, and expects to use 51,000 labor hours at a cost of $10.00 per hour. What is Cosi Company's overhead application rate?
a. 6.30%.
b. 63.0%.
c. 159%.
d. 1588%.
e. 67%.

Answer 1

Answer:

158.8%

Explanation:

Given:

Over head to be incurred by Cosi'[s Company for the next period = $810,000

Expected labor hours = 51,000 hours

Cost of labor = $10.00 per hour

The total labor cost = Expected labor hours × Cost of labor

                                 = 51,000 hours × $ 10.00 per hour

                                 = $510,000

To calculate Cosi's Company overhead application rate, the incurred overhead will be divided with total labor cost.

                        $Overhead\ application\ rate = \frac{Incurred\ overhead}{Total\ labor\ cost}$

                        $Overhead\ application\ rate = \frac{810,000}{510,000}$

                                                            =   1.588

In percentage, the overhead application rate is 1.588 × 100% = 158.8%

The correct answer is 158.8%.

NOTE

Considering the options given in the question, there is a kind of miss-up. It seems there is a typographical error of placing the decimal point in option d. Assuming there is an error of omitting the decimal point, option d will be the correct answer. But if option d was correctly typed the best possible option will be approximately 159% (option c).