Reamer Company uses a predetermined overhead rate based on machine-hours to appl
ID: 2435645 • Letter: R
Question
Reamer Company uses a predetermined overhead rate based on machine-hours to apply manufacturing overhead to jobs. The company has provided the following estimated costs for next year:Direct materials $1,000
Direct labor $3,000
Sales commissions $4,000
Salary of production supervisor $2,000
Indirect materials $ 400
Advertising expense $ 800
Rent on factory equipment $1,000
Reamer estimates that 500 direct labor-hours and 1,000 machine-hours will be worked during the year. The predetermined overhead rate per hour will be:
$6.80
$6.00
$3.00
$3.40
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Explanation / Answer
The formula for calculating the predetermined overhead rate is Predetermined overhead rate = Estimated total manufacturing overhead cost / Estimated total amount of the allocation base The total manufacturing costs includes the Salary of production supervisor, Indirect materials and Rent on factory equipment. Salary of production supervisor $2,000 Indirect materials $400 Rent on factory equipment $1,000 -------------------------------------------------- Total manufacturing overhead $3,400 -------------------------------------------------- If we assume the direct labor hours as the allocation base, then the predetermined overhead rate is POR = $3,400 / 500 = $6.8 per hour If we assume the machine hours as the allocation base, then the predetermined overhead rate is POR = $3,400 / 1000 = $3.4 per hour
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