Question

Which of the following statements are true concerning the predetermined overhead rate when the direct labor-hour requirement for the Deluxe model dropped from 5 hours to 2 hours?
a. The predetermined overhead rate decreases because the total estimated overhead cost increased.
b. The predetermined overhead rate decreased because the total direct labor-hours dropped.
c. The predetermined overhead rate increased because the total estimated overhead cost increased.
d. The predetermined overhead rate increased because the total direct labor-hours dropped.

Answer 1

Answer: The predetermined overhead rate increased because the total direct labor-hours dropped

Explanation:

The predetermined overhead rate refers to an allocation rate which is used in applying the estimated manufacturing overhead cost to the cost objects for a particular reporting period.

When there's reduction in the direct labor-hour requirement from 5 hours to 2 hours, the predetermined overhead rate increased because the total direct labor-hours dropped

The predetermined overhead rate is calculated as the total overhead cost divided by the machine hour. Therefore, if there's reduction in the direct labor hour rate, then there will be a rise in the predetermined overhead rate.