Question

Aaron, Inc. estimates direct labor costs and manufacturing overhead costs for the coming year to be $750,000 and $550,000, respectively. Aaron allocates overhead costs based on machine hours. The estimated total labor hours and machine hours for the coming year are 18,000 hours and 7000 hours, respectively. What is the predetermined overhead allocation rate? (Round your answer to the nearest cent.) A) $1.36 per labor hour B) $30.56 per labor hour C) $78.57 per machine hour D) $107.14 per machine hour

Answer 1

OAR = $78.57 per Machine Hour

Option c is the correct answer

Step-by-step explanation:

The overhead allocation rate also known as the overhead absorption rate (OAR) is the rate at which overheads are applied to a particular unit or product or a job. It provides the basis of allocation for the overheads that cannot be directly identified with a particular unit or product. The formula for OAR is,

OAR = Total budgeted overheads / Total budgeted allocation base

In the given question, the estimated overheads are $550000 while the absorption base is machine hours and the estimated number of machine hours is 7000.

OAR = 550000 / 7000

OAR = $78.57 per Machine Hour