Question

Our company makes sophisticated lenses for satellite cameras. We allocated our overhead (OH) costs using practical equipment machine hours (MHs).

For 2019, we estimated:

the cost of excess capacity of $760,000;
practical MHs of 25,000;
and estimated MHs used of 20,000.

We are considering switching to using "textbook" absorption costing to allocate our OH costs using estimated MHs. If we made the switch, our OH rate would be closest to:

Answer 1

If we made the switch, our OH rate would be closest to: $30.40 per MH

Step-by-step explanation:

Overhead Rate is used to allocate manufacturing overheads (indirect costs) to jobs and departments.

In our senario Overhead rate are used to allocate fixed manufacturing overheads to production of lenses for satellite cameras.

Overhead Rate = Budgeted Overheads / Budgeted Activity

= $760,000/ 25,000

= $30.40 per practical equipment machine hour