Question

Activity Levels Used to Compute Overhead Rates

Reggie Wilmore has just started a new business—building and installing custom garage organization systems. Reggie builds the cabinets and work benches in his workshop, then installs them in clients' garages. Reggie figures his overhead for the coming year will be $12,000. Since his business is labor intensive, he plans to use direct labor hours as his overhead driver. For the coming year, he expects to complete 100 jobs, averaging 25 direct labor hours each. However, he has the capacity to complete 125 jobs averaging 25 direct labor hours each.
Required:
Compute the predetermined overhead rates using each of the measures in your answer to Requirement.

Answer 1

Estimated manufacturing overhead rate= $4.8 per direct labor hour

Step-by-step explanation:

Giving the following information:

Estimated overhead= $12,000

Estimated direct labor hours= 100 jobs* 25 hours= 2,500 hours

To calculate the estimated manufacturing overhead rate we need to use the following formula:

Estimated manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Estimated manufacturing overhead rate= 12,000/2,500= $4.8 per direct labor hour