Question

Paulson Company had the following estimated costs for 2019:

Direct materials .................... $28,000
Direct labor ........................  22,000
Advertising expense .................  15,000
Rent on factory building ............  13,500
Depreciation on factory equipment ...   6,500
Indirect materials ..................  10,000
Sales commissions ...................  40,000
Production supervisor's salary ......  28,000
Insurance on equipment ..............  15,000

It is known that 40% of the insurance relates to equipment in the
factory while 60% of the insurance relates to the equipment in the
administrative offices.

Paulson Company estimates that 25,000 machine hours will be used
during 2019.

Calculate Paulson Company's pre-determined overhead rate based on
machine hours.

Answer 1

• Working, for calculating amount of overhead to be allocated

	Total	Direct Cost	Manufacturing Overhead	Selling & Administrative cost
Direct materials ....................	$28,000	$28,000
Direct labor ........................	$22,000	$22,000
Advertising expense .................	$15,000			$15,000
Rent on factory building ............	$13,500		$13,500
Depreciation on factory equipment ...	$6,500		$6,500
Indirect materials ..................	$10,000		$10,000
Sales commissions ...................	$40,000			$40,000
Production supervisor's salary ......	$28,000		$28,000
Insurance on equipment ..............	$15,000		$6,000	$9,000
Total	$178,000	$50,000	$64,000	$64,000

• Answer calculation:
  Pre determined Overhead rate = $ 64,000 / 25000 machine hours
  = 64000 / 25000
  = $ 2.56 per machine hour = Answer