Question

The following cost functions were developed for manufacturing overhead costs: Manufacturing Overhead Cost	Cost Function
Electricity	$200 + $20 per direct labor hour
Maintenance	$400 + $30 per direct labor hour
Supervisors' salaries	$20,000 per month
Indirect materials	$16 per direct labor hour

The estimated manufacturing overhead = $218600

Question : discuss the role of direct labor hours in determining the predetermined overhead rates.

Answer 1

As the overhead expense like electricity, maintenance and indirect material are based on direct Labor hour therefore it plays a major role in determining the exact overhead cost allocated to each area.

The total of Overhead cost will be the addition of all the types of manufacturing overhead.

Let the labour hour be X

218,600 = (200 + 20X) + (400 + 30X) + 20,000 + 16X

218,600 = 20,600 + 66X

198,000 = 66X

X = 3,000

Therefore total direct labor hour = 3,000 labour hour and this is used in determining the individual area of overhead cost attributal to the total of the manufacturing overhead cost.