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babygirlxxl
Mar 22, 2007, 06:50 AM
Showers Company estimates the following overhead costs for the coming year:
Equipment depreciation $150,000
Equipment maintenance 50,000
Supervisory salaries 20,000
Factory rent 200,000
Total $420,000

Showers is also budgeting $600,000 in direct labor costs and 14,000 machine hours for the coming year.
a. Calculate the predetermined overhead rate using direct labor costs as the
allocation base.
b. Calculate the predetermined overhead rate using machine hours as the allocation base.
Which of the allocation bases is preferred? Why?
bunnyKutty
Mar 23, 2007, 03:27 AM
Showers Company estimates the following overhead costs for the coming year:
Equipment depreciation $150,000
Equipment maintenance 50,000
Supervisory salaries 20,000
Factory rent 200,000
Total $420,000

Showers is also budgeting $600,000 in direct labor costs and 14,000 machine hours for the coming year.
a. Calculate the predetermined overhead rate using direct labor costs as the
allocation base.
b. Calculate the predetermined overhead rate using machine hours as the allocation base.
Which of the allocation bases is preferred? Why?
Predetermined overhead rate = Totaloverheads/Base for overhead allocation

a) Predetermined overhead rate = (420,000/600,000) * 100
= 70% of direct labour cost
b) Predetermined overhead rate = 420,000/14,000
= $30 per machine hour