Compton Company uses a predetermined overhead rate in applying overhead to produ

Question

Compton Company uses a predetermined overhead rate in applying overhead to production orders on a labor cost basis in Department A and on a machine-hours basis in Department B. At the beginning of the most recently completed year, the company made the following estimates: Dept.A Dept.B Direct labor cost $ 63,000 $ 40,000 Manufacturing overhead $ 80,010 $ 68,450 Direct labor-hours 8,700 9,700 Machine-hours 4,700 18,500 What predetermined overhead rate would be used in Department A and Department B, respectively

Explanation / Answer

PREDETERMINED OVERHEAD RATE = ESTIMATED OVERHEAD COST / ESTIMATED TOTAL UNITS IN ALLOCATION BASIS

For DEPARTMENT A:
You must use Direct labor cost because the question says "labor cost basis in Department A."
POR = Manufacturing Overhead / Direct Labor Cost
= $80,010 / $63,000
= 1.27
= 127% (by converting decimal to percent form).


For DEPARTMENT B:
You must use Machine-hours because the question says "machine-hour basis in Department B."
POR = Manufacturing Overhead / Machine-Hours
= $68,450 / 18500
= $3.7 per machine-hour

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