Figure 5-3. Mitchell's Softball Gloves Company estimated the following at the beginning of the year:
Mitchell uses departmental overhead rates.In the assembly department,direct labor hours are used to apply overhead.Machine hours are used to apply overhead in the testing department.
Actual data for August is as follows:
Refer to Figure 5-3.Mitchell decides to continue using departmental overhead rates.What are the predetermined rates for the Assembly and Testing departments respectively?

Question

Figure 5-3. Mitchell's Softball Gloves Company estimated the following at the beginning of the year:
 Mitchell uses departmental overhead rates.In the assembly department,direct labor hours are used to apply overhead.Machine hours are used to apply overhead in the testing department.
Actual data for August is as follows:
 Refer to Figure 5-3.Mitchell decides to continue using departmental overhead rates.What are the predetermined rates for the Assembly and Testing departments respectively?

Quizplus · Accepted Answer

To calculate the predetermined overhead rate, divide the estimated overhead costs by the estimated activity level.

For the Assembly department: 
Predetermined overhead rate = Estimated overhead costs / Estimated direct labor hours 
= $120,000 / 30,000 hours 
= $4 per direct labor hour

For the Testing department: 
Predetermined overhead rate = Estimated overhead costs / Estimated machine hours 
= $72,000 / 36,000 hours 
= $2 per machine hour

Therefore, the predetermined rates for the Assembly and Testing departments respectively are $4 per direct labor hour and $2 per machine hour. Choice A is the correct answer.