Logan Products computes its predetermined overhead rate annually on the basis of

Question

Logan Products computes its predetermined overhead rate annually on the basis of direct labor hours. At the beginning of the year, it estimated that 43,000 direct labor-hours would be required for the period's estimated level of production. The company also estimated $576,000 of fixed manufacturing overhead expenses for the coming period and variable manufacturing overhead of $4.00 per direct labor-hour. Logan's actual manufacturing overhead for the year was $832,823 and its actual total direct labor was 43,500 hours.

Explanation / Answer

Predetermined overhead rate is always calculated on estimated level of production.

Predetermined Overhead Rate = Estimated Total overhead / Estimated Total Hours

Estimated Total Overhead = Estimated Variable overhead + Estimated fixed overhead

= (43,000*4) + 576,000

= $748,000

Predetermined Overhead Rate = Estimated Total overhead / Estimated Total Hours

   = 748000/43000

= $17.40 Per Hour

Note: The actual data given in the question for Manufacturing overhead and total labor hours are not used for calculated Predetermined Overhead Rate.

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