Willow Creek Corporation bases its predetermined overhead rate on the estimated

Question

Willow Creek Corporation bases its predetermined overhead rate on the estimated labor hours for the upcoming year. At the beginning of the most recently completed year, the company estimated the labor hours for the upcoming year at 32,500 labor hours. The estimated variable manufacturing overhead was $5.55 per labor hour and the estimated total fixed manufacturing overhead was $710,000. The actual labor hours for the year turned out to be 40,000 labor hours.

Required: Compute the company's predetermined overhead rate for the recently completed year.

Explanation / Answer

Estimated Fixed overhead rate = Budgeted Fixed overhead / Budgeted labor hours = $710,000 / 32,500 = $21.85

Predetermined overhead rate = Estimated variable manufacturing overhead + Estimated Fixed overhead rate = $5.55 + $21.85 = $27.40

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