Brothers Construction uses a predetermined overhead rate of $6.00 per direct labor hour.Budgeted overhead was $720,000 and actual overhead incurred was $700,000.Actual direct labor hours worked were 125,000 hours.How many labor hours did Brothers plan to work during the year?

Question

Quizplus · Accepted Answer

Using the predetermined overhead rate, we can calculate the total amount of overhead that should have been applied to the actual direct labor hours worked:
Predetermined overhead rate x actual direct labor hours worked = overhead applied
$6.00 per direct labor hour x 125,000 direct labor hours = $750,000 overhead applied

Since actual overhead incurred was $700,000, there was an unfavorable overhead variance of $50,000:
Actual overhead incurred - overhead applied = overhead variance
$700,000 actual overhead incurred - $750,000 overhead applied = -$50,000 unfavorable variance

We can use this unfavorable variance to determine the amount of direct labor hours that Brothers planned to work:
Unfavorable overhead variance / predetermined overhead rate = planned direct labor hours
-$50,000 unfavorable variance / $6.00 predetermined overhead rate = -8,333 direct labor hours
(Note: we get a negative number because the variance is unfavorable, meaning actual overhead incurred was lower than overhead that should have been applied based on the predetermined rate)

To find the planned direct labor hours, we need to add this negative number to the actual direct labor hours worked:
Actual direct labor hours worked + planned direct labor hours = total planned direct labor hours
125,000 direct labor hours + (-8,333 direct labor hours) = 116,667 planned direct labor hours

However, this answer is not one of the choices given. We can also solve for the planned direct labor hours using the budgeted overhead and predetermined overhead rate:
Budgeted overhead / predetermined overhead rate = planned direct labor hours
$720,000 budgeted overhead / $6.00 predetermined overhead rate = 120,000 planned direct labor hours

This answer matches choice letter A, so the best choice is:
Answer: A) 120,000 hours
 There are two methods to calculate the planned direct labor hours, but the one that matches a choice letter is the one that uses the budgeted overhead and predetermined overhead rate. Therefore, the best choice is A) 120,000 hours.

Brothers Construction Uses a Predetermined Overhead Rate of $6