Question

Is Indirect Labor part of Fixed Overhead Costs?

I have to calculate the Overhead Allocation Rate based on the budgeted quantity of cost drivers.

From my problem:

Overhead is allocated on the basis of direct labor hours. Variable overhead costs include materials and supplies at $4.50 per direct labor hour. Fixed overhead costs include depreciation on equipment and vehicles of $25,000 and miscellaneous other job-related expenses of $10,000. There is also indirect labor of $6,500.  

My answer:

Variable OH Cost per hr * Time to complete job = $4.50 x 2.5 = $11.25

Fixed Overhead Costs/Total budgeted hrs = (25,000 + 10,000)/13.750 = 2.55 (Do I include Indirect Labor in Fixed OH costs?)

Answer 1

Indirect Labor Cost some times Variable Cost and in some times Fixed Costs. For your understanding, Salaries to Factory Supervisor or Salaries to Production Supervisors are Fixed in nature but they are indirect labor costs.

You have to consider these Indirect labor as fixed or variable based on information in the question.

In the question , Variable Overhead Cost per Direct labor hr is  given. So it is appropriate to consider the indirect labor cost as fixed overhead cost because it might be a salary to a factory supervisor etc. So include these indirect labor cost in your calculation.

So, Fixed Overhead Cost = ($25,000+$10,000+$6,500)/13,750 = $3.018