Question

Company who manufactures consumer electronics uses job costing and allocates manufacturing overhead costs to job numbers based on the pre-calculated overheads (direct work). Over- or under-covered costs, when realized, are taken into account as an adjustment to the costs of sold production.

The following is known from the accounting period:

- Budgeted manufacturing overheads: €4009999
- Budgeted direct manufacturing labor hours: 225500 h
- Realized manufacturing overheads: €4509588
- Realized immediate working hours: 201229 h


What is the manufacturing overhead rate?

Answer 1

The manufacturing overhead rate for the company is €17.78 per direct labor hour, calculated by dividing the budgeted manufacturing overheads (€4009999) by the budgeted direct manufacturing labor hours (225500 hours).

Step-by-step explanation:

The question asks how to calculate the manufacturing overhead rate, which is a crucial concept in the costing process of a company manufacturing consumer electronics. The overhead rate is determined by dividing the budgeted manufacturing overheads by the budgeted direct manufacturing labor hours. In the scenario provided, the budgeted overheads amount to €4009999, and the budgeted labor hours are 225500 hours.

Therefore, the manufacturing overhead rate can be calculated as follows:

Manufacturing Overhead Rate = Budgeted Manufacturing Overheads ÷ Budgeted Direct Manufacturing Labor Hours

To apply this formula, we divide €4009999 by 225500 h, which gives us:

€4009999 ÷ 225500 h = €17.78 per direct labor hour

This rate is used to allocate the overhead costs to job numbers. When terminology like 'spreading the overhead' is used, it refers to the allocation of fixed costs (overhead) across the units produced, which results in the average fixed cost. The average fixed cost curve typically decreases as production increases, demonstrating the economy of scale.