Question

Tampa Company has the following information: Total estimated manufacturing overhead costs $300,000 Total estimated direct labor costs 900,000 Actual direct labor costs 60,000 Actual manufacturing overhead costs 310,000 What is the predetermined overhead allocation rate based on direct labor costs as a single plantwide rate?

Answer 1

Answer: 33.3%

Explanation: The predetermined overhead rate allocates the manufacturing overhead to products. This is based on an estimate, as it is done at the beginning of the financial year. It uses an allocation base, which is usually a cost driver. A cost driver is a type of activity that causes a change in the cost of said activity. Examples of cost drivers usually used are: direct labour hours or machine hours.

The formula for calculating the predetermined overhead rate is:

Total estimated overhead costs ÷ total estimated overhead allocation base (estimated direct labour costs is used)

300 000 ÷ 900 000 = 0.33333 × 100 = 33.3%