ABC Company uses a pre-determined overhead rate based on direct labor hours to a
ID: 2449339 • Letter: A
Question
ABC Company uses a pre-determined overhead rate based on direct labor hours to apply overhead to jobs. At the beginning of 2006, the company estimated the following costs would be incurred:
direct materials ................... $ 62,500
direct labor ....................... 90,000 (total of 6,000 hours expected)
advertising expense ................ 15,000
utilities .......................... 20,000
rent on factory building ........... 15,000
depreciation on factory equipment .. 6,500
indirect materials ................. 10,000
sales commissions .................. 28,500
production supervisor's salary ..... 33,000
60% of the utilities relate to the factory while 40% of the utilities relate to the administrative office buildings. Calculate ABC Company's pre-determined overhead rate based on direct labor hours
Explanation / Answer
Calculation of ABC Company's pre-determined overhead rate based on direct labor hour
Manufacturing costs other than direct materials and direct labor are known as manufacturing overhead (also known as factory overhead). It usually consists of both variable and fixed components. Examples of manufacturing overhead cost include indirect materials, indirect labor, depreciation, salary of production manager, property taxes, fuel, electricity, grease used in machines, and insurance etc.
Unlike direct materials and direct labor, manufacturing overhead is an indirect cost that cannot be directly assigned to each individual job. This problem is solved by using a rate that is computed at the beginning of each period. This rate is known as predetermined overhead rate.
predetermined overhead rate.=Budgeted Manufacturinfg overhead/ Budgeted Labour hour
=(utilities $12000+rent on factory building $15,000+depreciation on factoryequipment$6,500 +indirect materials$10,000+ production supervisor's salary $33,000 )/6000hours
= $76500 /6000hrs
= $12.75 per hr
Particulars direct$ IndirectT$ Total$ Direct materials 62,500 62,500 Direct Labour(6000 hour expected) 90,000 90,000 Advertising expense 15,000 15,000 utilities(60% factory & 40% Administrative) 12,000 8,000 20,000 Rent on Factory Building 15,000 15,0000 depreciation on factory equipment 6,500 6,500 Indirect material 10,000 10,000 Sales commissions 28,500 28,500 production supervisor's salary 33,000 33,000