Techniques, Inc. uses a predetermined manufacturing overhead rate based on direct labor hours to apply its indirect product costs to jobs. The following information has been collected for the previous year: dir material 150K, dir labor 200K, indirect labor 50K sales commission 25K, depreciation on factory 75K utilites - factory 125K, rent on office bldg 25K guards at office building 25K Techniques used 25,000 direct labor hours and 50,000 machine hours during the previous year. What is the predetermined overhead rate if Techniques used machine hours

Predetermined overhead rate is $5 per machine hour

Explanation:

Predetermined overhead allocation rate is calculated by dividing the Expected overhead by the Expected level of activity on which the overhead is allocated. It is a rate at which the overhead is allocated to a product / project / department. Overhead associated with production process will only be recorded.

Predetermined overhead allocation rate = Expected overhead / Expected activity

Predetermined overhead allocation rate = Expected overhead / Expected machine hours

Expected overheads = Indirect labor + depreciation on factory + factory utilities = 50K + 75K + 125K = 250K

Predetermined overhead allocation rate = $250K / 50K machine hours

Predetermined overhead allocation rate = $5 per machine hours

Predetermined overhead rate = $6.5 per hour

Explanation:

Predetermined overhead absorption rate is used to charged indirect costs (overheads) to production units

The Pre-determined overhead absorption rate =

Budgeted overhead/Budgeted machine hours

Estimated overhead

= 50,000 + 25,000 + 75,000 + 125,000 + 25,000 + 25,000

= $325,000

Budgeted machine hours = 50,000

Predetermined overhead rate = $325,000/50,000 hours

= $6.5 per hour