Question

Harris Fabrics computes its predetermined overhead rate annually on the basis of direct labor-hours. At the beginning of the year, it estimated that 34,000 direct labor-hours would be required for the period’s estimated level of production. The company also estimated $599,000 of fixed manufacturing overhead expenses for the coming period and variable manufacturing overhead of $3.00 per direct labor-hour. Harris's actual manufacturing overhead for the year was $768,234 and its actual total direct labor was 34,500 hours.

Required:

Compute the company's predetermined overhead rate for the year. (Round your answer to 2 decimal places.)

Answer 1

Concepts and reason

Production: Production is a process or an activity that converts raw materials into finished goods. Raw materials started during the production may be processed in the same year or next year. Raw materials that are processed partially are known as work-in-process. Output of the production activity is termed as finished goods.

Manufacturing overhead: Manufacturing overhead is the indirect expense incurred in addition to the direct expenses during the production activity. Manufacturing overhead is also known as factory overhead. This cost is not directly traceable for a particular product. These are allocated to the product basing on the predetermined overhead rate.

Fundamentals

Estimated manufacturing overhead: Estimated manufacturing overhead is an estimate made by the company based on the previous records. The estimated manufacturing overhead will include variable manufacturing overhead and fixed manufacturing overhead.

Variable manufacturing overhead: Variable manufacturing overhead is the overhead expense that changes with the volume of production. It is directly proportional to the volume of production.

Fixed manufacturing overhead: Fixed manufacturing overhead is the overhead expense that remains constant even though the volume of production changes. This expense will not change upto a certain level of production.

Predetermined overhead rate: Predetermined overhead rate is used to apply manufacturing overhead to work in process inventory. Usually this predetermined overhead rate will be calculated at the beginning of the period. This rate is used to charge overhead costs to a particular job. It is calculated by dividing the overhead cost with the labor hours or machine hours as per the policy adapted by a company.

Calculate the estimated total overhead expense as shown below:

Thus, the estimated total overhead expense is.

Calculate the predetermined overhead rate as shown below:

Thus, the predetermined overhead rate is.

Ans:

The predetermined overhead rate is $ 20.62 per direct labor hour.