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25 June, 13:49

CWN Company uses a job order costing system and last period incurred $88,000 of actual overhead and $100,000 of direct labor. CWN estimates that its overhead next period will be $67,000. It also expects to incur $100,000 of direct labor cost. If CWN bases applied overhead on direct labor cost, its predetermined overhead rate for the next period should be:

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  1. 25 June, 14:27
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    The multiple choices are:

    a67%.

    b90%.

    c138%.

    d111%.

    e149%.

    Correct option is A, 67%

    Explanation:

    Predetermined overhead rate=budgeted overhead next period/expected direct labor cost for next period * 100

    budgeted overhead next period is $67,000

    expected direct labor cost for next period is $100,000

    Predetermined overhead rate=$67,000/$100,000*100

    =67%

    The correct option then is 67%, option A

    Option E was arrived at using the inverse of the formula:direct labor cost divided by overhead

    =100,000/67000*100=149%

    In other words, one has to be meticulous in applying the formula to the variables given in the question.
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