Baka Corporation applies manufacturing overhead on the basis of direct labor-hours. At the beginning of the most recent year, the company based its predetermined overhead rate on total estimated overhead of $240,200 and 4,780 estimated direct labor-hours. Actual manufacturing overhead for the year amounted to $242,000 and actual direct labor-hours were 4,610.The predetermined overhead rate for the year was closest to:
A) $52.49
B) $48.46
C) $50.25
D) $50.63

Question

Quizplus · Accepted Answer

The predetermined overhead rate is calculated as follows:

Predetermined Overhead Rate = Estimated Overhead / Estimated Direct Labor-hours

Using the information provided in the question, we can calculate the predetermined overhead rate as follows:

Predetermined Overhead Rate = $240,200 / 4,780 = $50.25 per direct labor-hour

Actual direct labor-hours are provided as 4,610. Therefore, we can calculate the actual overhead applied as follows:

Actual Overhead Applied = Actual Direct Labor-hours x Predetermined Overhead Rate
= 4,610 x $50.25 = $231,832.50

However, the actual manufacturing overhead for the year is given as $242,000. Hence, the amount of under- or over-applied overhead is:

Under- or Over-applied Overhead = Actual Overhead – Actual Overhead Applied
= $242,000 – $231,832.50 = $10,167.50 (overapplied)

Therefore, the predetermined overhead rate for the year was too high. To find the new predetermined overhead rate, we can adjust the numerator of the formula by subtracting the over-applied overhead:

New Predetermined Overhead Rate = (Estimated Overhead – Over-applied Overhead) / Estimated Direct Labor-hours
= ($240,200 – $10,167.50) / 4,780
= $229,032.50 / 4,780
= $48.03 per direct labor-hour

Rounding to two decimal places, the answer is closest to $50.25 which is option C.

Baka Corporation Applies Manufacturing Overhead on the Basis of Direct