Logan Products computes its predetermined overhead rate annually on the basis of

Question

Logan Products computes its predetermined overhead rate annually on the basis of direct labor-hours. At the beginning of the year, it estimated that 40,000 direct labor-hours would be required for the period’s estimated level of production. The company also estimated $561,000 of fixed manufacturing overhead expenses for the coming period and variable manufacturing overhead of $4.00 per direct labor-hour. Logan’s actual manufacturing overhead for the year was $798,862 and its actual total direct labor was 40,500 hours.

Compute the company’s predetermined overhead rate for the year.

Explanation / Answer

Solution-

Y = a + bX

Y = $561,000 + ($4.00)(40,000 direct labor-hours)

Estimated fixed manufacturing overhead = $561,000

Estimated variable manufacturing overhead = $4.00 X 40,000

Estimated variable manufacturing overhead = $160,000

Estimated total manufacturing overhead cost = $561,000 + 160,000

Estimated total manufacturing overhead cost = $721,000

Predetermined overhead rate = estimated total manufacturing overhead / estimated total direct labor-hours

Predetermined overhead rate = $721,000 / 40,000

Predetermined overhead rate = 18.025 per direct labor-hours

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