Question

Lexington Company's predetermined overhead rate is $4.00 per direct labor hour. Which of the following equations correctly computes the amount of overhead cost that should be applied to work in process assuming a job required 100 hours but was estimated to require 90 hours?

Answer 1

To properly apply overhead to work in progress, you must first calculate a projected overhead rate for the year. Your annual budget can provide the information required. For example, a labor overhead base is calculated by multiplying the total number of production hours required for the year by the average hourly employee rate (10,000 hours of production x $12.00/hour = $120,000 labor overhead base).

The labor overhead expenses are then totaled for the year ($25,000 benefits + $20,000 taxes + $12,000 training + $48,000 production floor rent + $24,000 electricity + $25,000 equipment cost + $26,000 factory supplies = $180,000 labor overhead expense).

To calculate the overhead rate, the labor overhead expense is divided by the labor overhead base ($180,000 / $120,000 = 150 percent labor overhead rate). This is the rate applied to each dollar of direct labor spent on work in progress. For example, if a product took 2 hours to make, the amount of overhead applied to work in progress would be $36 (2 hours x $12 = $24 x 150 percent = $36 labor overhead).

In the question Given above predetermined Rate is $ 4 Per direct labor. Question States that 100 hours would be utilized as against estimate of 90 hours. So Overhead cost would ,

Pre-determined Rate * Actual Direct Labor Hours

= 4 * 100

=$400