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?

Quote:

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Originally Posted by babygirlxxl

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?

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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

1. Predetermined Overhead Rate >>>> $420,000= .70 * 100 = 70%
$600,000 (labor cost)

2. Predetermined Overhead Rate .>>>> $420,000= $30.00 Machine Hours
14,000 (hours)

Wilkins Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining and machine setup. Presented below is information related to the company’s operations.



Standard

Custom

Direct labor costs $46,300 $115,000
Machine hours 1,340 1,490
Setup hours 100 430

Total estimated overhead costs are $307,900. Overhead cost allocated to the machining activity cost pool is $198,400, and $109,500 is allocated to the machine setup activity cost pool.



Compute the overhead rate using the traditional (plantwide) approach. (Round answers to 2 decimal places, e.g. 12.25%.)


Predetermined overhead rate ________________% of direct labor cost



P.S I do not know how to calculate this problem, please help