Question

Lane Company manufactures a single product that requires a great deal of hand labor. Overhead cost is applied on the basis of standard direct labor-hours. Variable manufacturing overhead should be $4.60 per standard direct labor-hour and fixed manufacturing overhead should be $1,935,000 per year.

The company’s product requires 4 pounds of material that has a standard cost of $9.50 per pound and 1.5 hours of direct labor time that has a standard rate of $13.30 per hour.

The company planned to operate at a denominator activity level of 225,000 direct labor-hours and to produce 150,000 units of product during the most recent year. Actual activity and costs for the year were as follows:

Number of units produced	180,000
Actual direct labor-hours worked	292,500
Actual variable manufacturing overhead cost incurred	$789,750
Actual fixed manufacturing overhead cost incurred	$2,047,500

Required:

1. Compute the predetermined overhead rate for the year. Break the rate down into variable and fixed elements. (Round your answers to 2 decimal places.)

	Predetermined overhead rate per DLH Variable rate per DLH Fixed rate per DLH

Answer 1

Basis for application of overhead cost is standard direct labor hours.

Predetermined overhead rate = [ ( Standard manufacturing overhead rate per direct labor hour * Estimated direct labor hours ) + Estimated fixed manufacturing overhead ) ] / Estimated direct labor hours = [ ( $4.6 * 225,000 direct labor hours ) + $1,935,000 ] / 225,000 direct labor hours = $13.2 per direct labor hour

Variable rate = Standard manufacturing overhead rate per direct labor hour = $4.6 per direct labor hour

Fixed rate = Estimated fixed manufacturing overhead / Estimated direct labor hours = $1,935,000 / 225,000 direct labor hours = $8.6 per direct labor hour