Question

Lightner Corporation bases its predetermined overhead rate on the estimated machine-hours for the upcoming year. Data for the upcoming year appear below:

Estimated machine-hours	50,000
Estimated variable manufacturing overhead	$ 8.82 per machine-hour
Estimated total fixed manufacturing overhead	$1,077,000

Required:

Compute the company's predetermined overhead rate.

Answer 1

Answer

Predetermined overhead rate is used to apply manufacturing overhead to work in process inventory and is usually computed at the beginning of each period using following formula.

Predetermined overhead rate = Total Estimated manufacturing overhead cost / Estimated total units in the allocation base

Calculation of Total Estimated manufacturing overhead cost:

Y= a + bX

where,

Y = The estimated total manufacturing overhead cost

a = The estimated total fixed manufacturing overhead cost

b = The estimated variable manufacturing overhead cost per unit of the allocation base

X = The estimated total amount of the allocation base( here, Machine hours)

Y = $1,077,000 + $8.82*50,000

= $1,077,000 + $441000

Y = $1518000

Calculation of Predetermined Overhead Rate :

Predetermined overhead rate = Total Estimated manufacturing overhead cost / Estimated total units in the allocation base

Predetermined overhead rate = $1518000 / 50000

Predetermined overhead rate = $30.36