Axsom Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The direct labor budget indicates that 1,300 direct labor-hours will be required in March. The variable overhead rate is $8.90 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $20,020 per month, which includes depreciation of $2,600. All other fixed manufacturing overhead costs represent current cash flows. The company recomputes its predetermined overhead rate every month. The predetermined overhead rate for March should be:

Question

Quizplus · Accepted Answer

To calculate the predetermined overhead rate, we need to divide the estimated total manufacturing overhead costs by the estimated total direct labor-hours for the month.

Variable overhead cost = Variable overhead rate x Direct labor hours 
Variable overhead cost = $8.90 x 1,300 = $11,570

Fixed overhead cost = Total manufacturing overhead - Variable overhead cost 
Fixed overhead cost = $20,020 - $11,570 = $8,450

Total overhead cost = Fixed overhead cost + Variable overhead cost 
Total overhead cost = $8,450 + $11,570 = $20,020

Therefore, the predetermined overhead rate for March is:

Predetermined overhead rate = Total manufacturing overhead / Direct labor hours 
Predetermined overhead rate = $20,020 / 1,300 = $15.40

The correct answer choice is B, which is the closest option to the calculated amount after taking into account newly updated budgeted amounts for overhead.

Axsom Inc Bases Its Manufacturing Overhead Budget on Budgeted Direct Labor-Hours