Harris Fabrics computes its plantwide predetermined overhead rate annually on the basis of direct labor-hours. At the beginning of the year, it estimated that 43,000 direct labor-hours would be required for the period’s estimated level of production. The company also estimated $534,000 of fixed manufacturing overhead cost for the coming period and variable manufacturing overhead of $2.00 per direct labor-hour. Harris’s actual manufacturing overhead cost for the year was $694,634 and its actual total direct labor was 43,500 hours.
Required:
Compute the company’s plantwide predetermined overhead rate for the year. (Round your answer to 2 decimal places.)
The Correct Answer and Explanation is :
To compute the plantwide predetermined overhead rate, we need to use the following formula:
[
\text{Predetermined Overhead Rate (POHR)} = \frac{\text{Total Estimated Manufacturing Overhead}}{\text{Estimated Direct Labor-Hours}}
]
Where:
- Total Estimated Manufacturing Overhead is the sum of estimated fixed manufacturing overhead and the variable manufacturing overhead (which is calculated as the variable rate multiplied by the estimated direct labor-hours).
- Estimated Direct Labor-Hours is the estimated number of direct labor-hours for the year.
Step-by-step calculation:
- Fixed Manufacturing Overhead: $534,000 (provided in the problem)
- Variable Manufacturing Overhead: $2.00 per direct labor-hour
- Estimated Direct Labor-Hours: 43,000 hours
Calculate the Total Estimated Manufacturing Overhead:
First, calculate the total estimated variable manufacturing overhead by multiplying the variable overhead rate by the estimated direct labor-hours:
[
\text{Variable Manufacturing Overhead} = 2.00 \times 43,000 = 86,000
]
Then, add the fixed manufacturing overhead:
[
\text{Total Estimated Manufacturing Overhead} = 534,000 + 86,000 = 620,000
]
Calculate the Predetermined Overhead Rate:
Now that we know the total estimated manufacturing overhead ($620,000) and the estimated direct labor-hours (43,000), we can calculate the predetermined overhead rate:
[
\text{POHR} = \frac{620,000}{43,000} = 14.42
]
So, the predetermined overhead rate for the year is $14.42 per direct labor-hour.
Explanation:
The predetermined overhead rate is an essential metric for allocating overhead costs to products throughout the year. By computing this rate at the start of the year, Harris Fabrics can estimate and apply manufacturing overhead based on actual labor-hours worked. This system ensures that overhead costs are allocated uniformly across all units produced during the year, even though actual overhead may fluctuate due to changes in costs or production volume. Since the rate is based on estimates made at the beginning of the year, it is essential to monitor actual costs to evaluate any significant discrepancies and make adjustments as needed. In this case, the rate of $14.42 per labor-hour is used throughout the year to allocate both fixed and variable overhead costs.