Final answer:
To determine the predetermined shop overhead rate per direct labor hour, add all overhead costs and divide by total direct labor hours. Total overhead cost is $302,400. With 25,000 direct labor hours available, the rate is $12.10 per direct labor hour.
Step-by-step explanation:
The predetermined shop overhead rate per direct labor hour is calculated by adding up all the overhead costs and then dividing by the total direct labor hours. First, we need to identify which costs are considered overhead. For Street Runner Engine Shop, the overhead costs include the shop and repair equipment depreciation, shop supervisor salaries, shop property taxes, shop supplies, advertising expense, administrative office salaries, and administrative office depreciation expense. Adding these together gives us:
Shop and repair equipment depreciation: $40,000
Shop supervisor salaries: $133,000
Shop property taxes: $22,000
Shop supplies: $10,000
Advertising expense: $20,000
Administrative office salaries: $71,400
Administrative office depreciation expense: $6,000
The total overhead costs are $302,400. Given that the direct labor hours are calculated by taking the shop direct labor cost and dividing it by the direct labor rate ($500,000 / $20 per hour), this gives us 25,000 total direct labor hours. Thus:
Predetermined Overhead Rate = Total Overhead Costs / Total Direct Labor Hours
Predetermined Overhead Rate = $302,400 / 25,000 hours = $12.10 per direct labor hour.