Question

Winterville Heating & Cooling uses job costing. Overhead is allocated to each job based on the number of labor hours spent on that job.  

At the beginning of the year, Winterville estimated that OH for the coming year would be $117,600. It also anticipated using 5,600 direct labor hours for the year.

What is Winterville's predetermined OH rate based on direct labor hours?

Answer 1

Solution:

Predetermined Overhead Rate = Estimated Total Overhead Cost / Estimated Total units in the Allocation Base

Note:Overhead rate is calculated on the allocation base units.

Here,

Overhead is Allocated to each job on the basis of direct labor hours spent.

Therefore,here the allocation base to calculate predetermined overhead rate is Direct labour hours.

Predetermined Overhead Rate = Estimated total overhead cost / Estimated total direct labor hours

= $117,600 / 5,600 direct labor hours

= $21 per direct labor hour.

Hence, Winterville's predetermined overhead rate based on direct labour hours is $21 per direct labour hour.