Simple Plant manufactures DNA test strips. Manufacturing overhead is applied to

Question

Simple Plant manufactures DNA test strips. Manufacturing overhead is applied to units produced using direct labor dollars as the alloation base. The overhead rate is calculated rate prior to the beginning of the fisccal year that runs January 1 to December 31. Simple Plant has one manufacturing employee, J. Kusic, and one overhead expense besides indirect labors, property taxes. J Kusic's salary and fringe benefits for next year are forecast to be $50,000. Kusic is expected to work 2,000 hours at a cost of $25 per hour ($50,000/2,000). Eighty percent of Kusic's time is budgeted to be direct labor, and the reminder is budgeted to be indirect labor. Property taxes are projected to be $110,000. There was no beginning balance of work in process of work in process on January 1.

Explanation / Answer

a) Plant overhead rate Eighty percent of Kusic’s time is budgeted to direct labor, and the remainder is budgeted to indirect labor = 50000*20% = 10000 Property taxes are projected to be $110,000. Total overhead costs = 110000+10000 = 120000 Therefore, for plant overhead rate = 120000/ direct labour dollars = 120000/40000 = 3 Therefore, for every $1 of direct labour spent, $3 of manufacturing overhead should be charged

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