In: Accounting
One of bills plants predicts a 2019 activity level of 50,000 direct labor hours and total manufacturing overhead costs of $200,000. Actual direct labor hours for 2019 totaled 45,000. What is Ford’s 2019 predetermined overhead rate?
Predetermined overhead rate is calculated by dividing estimated overhead cost by allocation base ( here, direct labor hours). Predetermined overhead rate is purely based on estimates and nothing to do with the actual overhead cost or actual direct labour hours. There usually arises a difference between estimated overhead rate and actual overhead rate which is adjusted at the end of the year.
Predetermined Overhead Rate = Estimated total manufacturing overhead cost / Estimated allocation base(direct labor hours)
Predetermined Overhead Rate = $200,000 / 50,000
Predetermined Overhead Rate = $4
Note: In the question it says, the prediction for 2019 to be 50,000 direct labor hours and manufacturing overhead cost to be $200,000, so these are estimated figures that are required to calculate Predetermined Overhead Rate.
Actual direct labor hours of 45,000 is not used in the calculation of Predetermined Overhead Rate since it is not an estimation but actual labor hours. Predetermined Overhead Rate requires estimated figures for calculation.