Taperno Manufacturing Company has made the following cost estimates for next yea

Question

Taperno Manufacturing Company has made the following cost estimates for next year: Direct Labor $90,000 Direct materials 72,000 Indirect labor 19,200 Indirect materials 8,400 Depreciation - factory building 8,200 Depreciation - factory machinery 4,200 Depriciation - office equipment 500 Factory utilities 4,900 Factory property taxes 3,100 Selling expenses 25,000 Miscellaneous overhead costs 5,600 General and administrative expenses 19,000 The company applies overhead based on direct labor hours. The estimated direct labor hours for next year are 16,000 hours. Compute the overhead application rate that will be used to apply overhead during the next year Please show work

Explanation / Answer

Answer:

Overhead Application rate is the pre-determined overhead rate calculated at the beginning of the period on the basis of estimated overhead by taking suitable base for charging the same on production units to be produced during the year.

All the indirect costs are included in calculating the overhead application rate. Overhead means indirect expenses.

Total Estimated Overheads = Indirect materials 8,400 + Depreciation - factory building 8,200 + Depreciation - factory machinery 4,200 + Depriciation - office equipment 500 + Factory utilities 4,900 + Factory property taxes 3,100 + Selling expenses 25,000 + Miscellaneous overhead costs 5,600 + General and administrative expenses 19,000 = $78,900

Direct Labor Hours = 16,000 Hours

Overhead Application Rate = Total Estimated Overhead Expenses / Direct Labor Hours = $78,900 / 16,000 = $4.93125 per direct labor hour

The above overhead application rate is calculate on the assumption of that company charges one rate for all the indirect costs to be incurred during the year.

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