Question

Review Exercise 3-1 on page 115 of the text. Compute the company's predetermined overhead rate and explain the four-step process to compute a predetermined overhead rate. How would this rate be effected if the direct labor hours increased to 25,000? How would the rate be effected if the overhead were to increase to $150,000. Give examples of some of the challenges a manager may have in completing this computation.

Harris Fabrics computes its predetermined overhead rate annually on the basis of direct labor hours. At the beginning of the year, it estimated that 20,000 direct labor-hours would be required for the period’s estimated level of production. The company also estimated $94,000 of fixed manufacturing overhead expenses for the coming period and variable manufacturing overhead of $2.00 per direct labor hour. Harris’s actual manufacturing overhead for the year was $123,900 and its actual total direct labor was 21,000 hours.

Required:

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

Answer 1