Question

Predetermined Factory Overhead Rate

Spring Street Engine Shop uses a job order cost system to determine the cost of performing engine repair work. Estimated costs and expenses for the coming period are as follows:

Engine parts		$1,644,000
Shop direct labor		1,200,000
Shop and repair equipment depreciation		72,900
Shop supervisor salaries		202,800
Shop property tax		36,800
Shop supplies		28,300
Advertising expense		32,900
Administrative office salaries		141,400
Administrative office depreciation expense		18,100
	Total costs and expenses	$3,377,200

The average shop direct labor rate is $25 per hour.

Determine the predetermined shop overhead rate per direct labor hour. Round the answer to nearest whole cent.
$ per direct labor hour

Answer 1

Ans.	*Predetermined overhead rate   =   Budgeted manufacturing overhead cost / Budgeted direct labor hours
	$340,800 / 48,000
	$7.10 per direct labor hour
	WORKING NOTES :
	Step 1 : Calculations for Budgeted manufacturing overhead :
	Particulars	Budgeted overhead
	Shop and repair equipment depreciation	$72,900
	Shop supervisor salaries	$202,800
	Shop property tax	$36,800
	Shop supplies	$28,300
	Total manufacturing overhead	$340,800
	Step 2 : Calculations for Budgeted direct labor hours :
	Budgeted direct labor hours = Shop Direct labor cost / Direct labor rate
	$1,200,000 / $25
	48,000 hours
	*In the calculation of predetermined overhead rate, only manufacturing overhead
	costs are included.
	The other costs and expenses are related to selling, administrative and office. So these
	are not included in the computaion of predetermined overhead rate.