EA7.

LO 4.4A company estimates its manufacturing overhead will be $750,000 for the next year. What is the predetermined overhead rate given the following independent allocation bases?

Budgeted direct labor hours: 60,000

Budgeted direct labor expense: $1,500,000

Estimated machine hours: 100,000

Overhead Rate based on:

Direct labor hours: $12.5 per labor hour

Direct labor expense: 50% of labor cost e. g. $0.5 for every dollar of labor cost

Machine hours: $7.5 per machine hour

Explanation:

Overhead rate is calculated by dividing the total estimated manufacturing overhead to the relevant activity base selected e. g. machine hours, labor hours, labor cost etc.

Overhead rates are calculated for different bases are as follows:

Direct labor hours: $750,000 / 60,000 = $12.5 per hour

Direct labor Expense: $750,000 / 1,500,00 = 50% ($0.5 for every dollar cost of direct labor)

Machine hours: $750,000 / 100,000 = $7.5 per machine hour.