Harris Fabrics computes its predetermined overhead rate annually on the basis of direct labor hours.

Harris Fabrics computes its predetermined overhead rate annually on the basis of direct labor hours. At the beginning of the year, it estimated that 20,000 direct labor-hours would be required for the period’s estimated level of production. The company also estimated $94,000 of fixed manufacturing overhead expenses for the coming period and variable manufacturing overhead of $2.00 per direct labor-hour. Harris’s actual manufacturing overhead for the year was $123,900 and its actual total direct labor was 21,000 hours.

Required:

Compute the company’s predetermined overhead rate for the year.

The predetermined overhead rate is $6.70 per direct labor hour

Rationale:

  • Solve for estimated variable manufacturing overhead

Estimated variable manufacturing overhead = (Variable manufacturing overhead x Estimated direct labor hour) = ($2 per direct labor hour x 20,000 direct labor hours) = $40,000

  • Calculate total estimated manufacturing overhead

In this case, estimated fixed manufacturing overhead is provided. ($94,000)

  • Calculate total estimated manufacturing overhead

Total estimated manufacturing overhead = (estimated fixed manufacturing overhead + estimated variable manufacturing overhead) = ($94,000 + $40,000) = $134,000 

  • Calculate predetermined overhead rate:

Predetermined overhead rate = (total estimated manufacturing overhead / estimated direct labor hour) = $134,000 / 20,000 direct labor hours = $6.70 per direct labor hour

 

 

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