Question

Using the following budget data for Valley Corporation, which produces only one product, calculate the company’s predetermined manufacturing overhead application rate for variable overhead. Hint: The factory supervisor’s salary is direct labor, since it is incurred regardless of production. SG&A expenses relate to the entire operations of Valley Corporation and not just related to manufacturing.

Units to be produced 11,000
Units to be sold 10,000
Indirect materials, varying with production $1,000
Indirect labor, varying with production 10,000
Factory supervisor’s salary, incurred regardless of production 20,000
Depreciation on factory building and equipment 30,000
Utilities to operate factory machines 12,000
Security lighting for factory 2,000
Selling, general and administrative (SG&A) expenses 5,000

Answer 1

Answer: The company's predetermined manufacturing overhead application rate for variable overhead is $2.27 per unit.

Explanation: we need to determine the total variable overhead costs and divide it by the number of units to be produced.

Total Variable Overhead Costs:

Indirect materials: $1,000

Indirect labor: $10,000

Utilities: $12,000

Security lighting: $2,000

Total Variable Overhead Costs = $1,000 + $10,000 + $12,000 + $2,000 = $25,000

Number of Units to be Produced = 11,000

Predetermined Manufacturing Overhead Application Rate for Variable Overhead:

Predetermined Manufacturing Overhead Application Rate = Total Variable Overhead Costs / Number of Units to be Produced

Predetermined Manufacturing Overhead Application Rate = $25,000 / 11,000 = $2.27 per unit