Question

Agassi Company uses a job order cost system in each of its three manufacturing departments. Manufacturing overhead is applied to jobs on the basis of direct labor cost in Department D, direct labor hours in Department E, and machine hours in Department K.

In establishing the predetermined overhead rates for 2017, the following estimates were made for the year.

Department
D
E
K
Manufacturing overhead $1,280,000 $1,500,000 $840,000
Direct labor costs $1,600,000 $1,312,500 $472,500
Direct labor hours 105,000 125,000 42,000
Machine hours 420,000 525,000 120,000

During January, the job cost sheets showed the following costs and production data.

Department
D
E
K
Direct materials used $147,000 $132,300 $81,900
Direct labor costs $126,000 $115,500 $39,375
Manufacturing overhead incurred $103,950 $105,000 $82,950
Direct labor hours 8,400 11,550 3,675
Machine hours 35,700 47,250 10,380

Compute the predetermined overhead rate for each department.

Answer 1

Basis for calculating the predetermined overhead rate for department D is direct labor cost, for department E it is direct labor hours and for department K it is machine hours.

Predetermined overhead rate ( Department D ) = [ Estimated manufacturing overhead / Estimated direct labor cost ] * 100 = [ $1,280,000 / $1,600,000 ] * 100 = 80% of direct labor cost

Predetermined overhead rate ( Department E ) = Estimated manufacturing overhead / Estimated direct labor hours = $1,500,000 / 125,000 direct labor hours = $12 per direct labor hour

Predetermined overhead rate ( Department K ) = Estimated manufacturing overhead / Estimated machine hours = $840,000 / 120,000 machine hours = $7 per machine hour