Question

Austin Accounting Services estimates for next year revenues of $2,000,000, direct labor

of $400,000, and overhead of $700,000. Under traditional costing, overhead is applied
to audit jobs using the rate of
A) 35% of revenues.
B) 20% of revenues.
C) 56% of direct labor.
D) 175% of direct labor.

Answer 1

The overhead rate under traditional costing for Austin Accounting Services is applied to audit jobs using 175% of direct labor, calculated by dividing the overhead of $700,000 by the direct labor cost of $400,000.

Step-by-step explanation:

Calculating Overhead Rate in Traditional Costing

To determine the correct overhead rate under traditional costing for Austin Accounting Services, we need to apply overhead to audit jobs using either a percentage of revenues or a percentage of direct labor. Given the information that revenues are $2,000,000, direct labor is $400,000, and overhead is $700,000, we can calculate the overhead rate.

To calculate Option A: $700,000 (overhead) ÷ $2,000,000 (revenues) = 0.35 or 35% of revenues.

To calculate Option B: This option is not calculated because it does not align with provided overhead or direct labor costs.

To calculate Option C: $700,000 (overhead) ÷ $400,000 (direct labor) = 1.75 or 175% of direct labor.

To calculate Option D: This option is not calculated because it does not correspond with any given data and is not an accurate calculation method for the overhead rate.

Hence, the correct answer is: D) 175% of direct labor.