Question

If annual overhead costs are expected to be $1,000,000 and 200,000 total labor hours are anticipated (80% direct, 20% indirect), the overhead rate based on direct labor hours is:

a. $6.25
b. $5.00
c. $25.00
d. $4.00

Answer 1

The overhead rate based on direct labor hours is $5.00. So, the correct answer is option b.

Step-by-step explanation:

To calculate the overhead rate based on direct labor hours, we need to divide the annual overhead costs by the total number of direct labor hours. In this case, the annual overhead costs are $1,000,000 and the direct labor hours are 80% of the total labor hours, which is 200,000. Therefore, the overhead rate based on direct labor hours is $5.00 ($1,000,000 divided by 200,000).

So, the correct answer is option b.