Question

Tiger Furnishings produces two models of cabinets for home theater components, the Basic and the Dominator. Data on operations and costs for March follow: Basic Dominator Total Units produced 1,000 250 1,250 Machine-hours 4,500 2,500 7,000 Direct labor-hours 3,000 2,000 5,000 Direct materials costs $ 10,000 $ 3,750 $ 13,750 Direct labor costs 64,500 35,500 100,000 Manufacturing overhead costs 175,000 Total costs $ 288,750

Required:

Compute the predetermined overhead rate assuming that Tiger Furnishings uses direct labor-hours to allocate overhead costs.

predetermined overhead rate, per direct labor hour?

Answer 1

Predetermined overheads Absorption rate =$35 per hour

Step-by-step explanation:

Under absorption costing, overheads are to all units produced using volume-related bases like labour hours, machine hours e.t.c

Overheads are charged to units produced by the means of an estimated overhead absorption rate (OAR). This rate is computed using budgeted overhead and budgeted activity level.

Where overheads are to be absorbed using labour hours basis,

the OAR is computed as follows:

OAR = Budgeted overheads cost for the period/Budgeted labour hours

OAR = $175,000/(2000+3000) direct labour hours

= $35 per hour

Predetermined overheads Absorption rate =$35 per hour