Question

Compute various manufacturing overhead rates.

Edmonton Pools manufactures swimming pool equipment. Edmonton estimates total manufacturing overhead costs next year to be $1,400,000. Edmonton also estimates it will use 50,000 direct labor hours and incur $1,000,000 of direct labor cost next year. In addition, the machines are expected to be run for 40,000 hours. Compute the predetermined manufacturing overhead rate for next year under the following independent situations:

1. Assume that the company uses direct labor hours as its manufacturing overhead allocation base.
2. Assume that the company uses direct labor cost as its manufacturing overhead allocation base.
3. Assume that the company uses machine hours as its manufacturing overhead allocation base.

Answer 1

Answer:

1. $28 per direct labor hour

2. 140%

3. $35 per machine hour

Explanation:

Given that,

Total manufacturing overhead costs next year = $1,400,000

Direct labor hours used = 50,000

Direct labor cost next year = $1,000,000

Machines are expected to be run = 40,000 hours

1. Manufacturing overhead rate:

= Total manufacturing overhead cost ÷ Direct labor hours used

= $1,400,000 ÷ 50,000

= $28 per direct labor hour

2. Manufacturing overhead rate:

= (Total manufacturing overhead cost ÷ Direct labor cost) × 100

= ($1,400,000 ÷ $1,000,000) × 100

= 140%

3. Manufacturing overhead rate:

= Total manufacturing overhead cost ÷ Machine hours

= $1,400,000 ÷ 40,000

= $35 per machine hour