A company provided the following estimated costs for producing 3000 units of a s

Question

A company provided the following estimated costs for producing 3000 units of a specialty product
Direct materials 7,000
Direct labor ( 1 hour per unit) 30,000
Unit-level costs 8,000
Batch-level costs 2000
Product-level support costs 4000
Facility-level support costs 5000
the company believes that direct labor hours are the most appropriate cost driver for assingning overhead costs to its product.
1- compute the predetermined overhead rate for the comany
2- compute the specialty product's total estimated cost per unit
3-why do firm assign overhead costs using a predetermined overhead rate instead of a ctual rate?

Explanation / Answer

1- compute the predetermined overhead rate for the comany

Batch-level costs                                       2,000
Product-level support costs                        4,000
Facility-level support costs                        5,000
Total overhead costs                            11,000
Direct labor hours                                    3,000 hours
Predetermined overhead rate
                        11,000 / 3,000                3.67 per DLH


2- compute the specialty product's total estimated cost per unit
    Direct materials                                    7,000
    Direct labor ( 1 hour per unit)              30,000
    Unit-level costs                                    8,000
    overhead cost  3,000 x 3.67                11,000
    Total estimated cost                           56,000
    Total number of units produced             3,000 units
     Total cost per unit   56,000 / 3,000      18.67

3-why do firm assign overhead costs using a predetermined overhead rate instead of a ctual rate?

If an actual rate is computed monthly or quarterly, seasonal factors in overhead costs or in the activity base can produce fluctuations in the overhead rate. To avoid such fluctuations, actual overhead rates could be computed on an annual or less-frequent basis.  For these reasons, most companies use predetermined overhead rates rather than actual overhead rates in their cost accounting systems.

The use of such a rate enables an enterprise to determine the approximate total cost of each job when completed. In recent years increased automation in manufacturing operations has resulted in a trend towards machine hours as the activity base in the calculation.

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