Kinetic Company estimates that overhead costs for the next year will be $1,600,000 for indirect labor and $400,000 for factory utilities.The company uses direct labor hours as its overhead allocation base.If 50,000 direct labor hours are planned for this next year,then the plantwide overhead rate is $.025 per direct labor hour.

Question

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The plantwide overhead rate is calculated by dividing the total estimated overhead costs by the total estimated base activity (in this case, direct labor hours). The total estimated overhead costs are $1,600,000 for indirect labor plus $400,000 for factory utilities, which equals $2,000,000. Dividing this by the 50,000 direct labor hours planned for the next year gives an overhead rate of $40 per direct labor hour ($2,000,000 / 50,000 hours).

Kinetic Company Estimates That Overhead Costs for the Next Year