Petty Corporation has two production departments, Milling and Finishing. The company uses a job-order costing system and computes a predetermined overhead rate in each production department. The Milling Department's predetermined overhead rate is based on machine-hours and the Finishing Department's predetermined overhead rate is based on direct labor-hours. At the beginning of the current year, the company had made the following estimates:

-The predetermined overhead rate for the Finishing Department is closest to:
A) $5.84 per direct labor-hour
B) $3.60 per direct labor-hour
C) $11.00 per direct labor-hour
D) $14.60 per direct labor-hour

Question

Petty Corporation has two production departments, Milling and Finishing. The company uses a job-order costing system and computes a predetermined overhead rate in each production department. The Milling Department's predetermined overhead rate is based on machine-hours and the Finishing Department's predetermined overhead rate is based on direct labor-hours. At the beginning of the current year, the company had made the following estimates:
 
-The predetermined overhead rate for the Finishing Department is closest to:
A) $5.84 per direct labor-hour 
B) $3.60 per direct labor-hour 
C) $11.00 per direct labor-hour 
D) $14.60 per direct labor-hour

Quizplus · Accepted Answer

Finishing Department overhead cost = Fixed manufacturing overhead cost + (Variable overhead cost per direct labor-hour × Total direct labor-hours in the department)
= $88,000 + ($3.60 per direct labor-hour × 8,000 direct labor-hours)
= $88,000 + $28,800 = $116,800
Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base incurred = $116,800 ÷8,000 direct labor-hours = $14.60 per direct labor-hour

Petty Corporation Has Two Production Departments, Milling and Finishing