Activity Levels Used to Compute Overhead Rates Reggie Wilmore has just started a

Question

Activity Levels Used to Compute Overhead Rates Reggie Wilmore has just started a new business-building and installing custom garage organization systems. Reggie builds the cabinets and work benches in his workshop, then installs them in clients' garages. Reggie figures his overhead for the coming year will be $15,600. Since his business is labor intensive, he plans to use direct labor hours as his overhead driven. For the coming year, he expects to complete 140 jobs, averaging 35 direct labor hours each. However, he has the capacity to complete 175 jobs averaging 35 direct labor hours each Required: 1. Compute the predetermined overhead rates using each of the measures in your answer to Requirement 1. Round your answers to the nearest cent. Predetermined Overhead Rate Expected actual activity Theoretical activity 2. Which one would you recommend that Reggie use? per hour per hour Expected actual activity Theoretical activity

Explanation / Answer

1. Predetermined overhead rate:

Expected actual activity = $15600/ (140 x 35) = $3.18

Theoretical activity = $15600/ (175 x 35) = $2.55

2. Expected actual activity.

Since Expected actual activity, is more reliable.

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