![]() ![]() The overhead rate for the molding department is $6 per machine hour. Overhead rate for the molding department = estimated manufacturing overhead cost/ estimated machine hours The overhead rate for the molding department is computed by taking the estimated manufacturing overhead cost and dividing it by the estimated machine hours. Now, calculate the predetermined overhead rate for the departments listed above. Whereas the packaging department bases its overhead rate on labor hours. The molding department bases its overhead rate on its machine hours. Molding Departmentĭirect labor cost: $50,000 Packaging Department These are the estimates the company computed at the start of 2021. The Holiday Candy Company uses a job-order costing system and calculates different predetermined overhead rates for its molding and packaging departments. Using multiple predetermined overhead rates is more complicated and takes more time, but it is generally thought to be more accurate than using a single predetermined overhead rate for the entire plant. Large companies will typically have a predetermined overhead rate for each production department. This rate is generally only used by small companies. ![]() The predetermined overhead rate as calculated above is a plant-wide overhead rate or a single predetermined overhead rate. AnswerĮstimated manufacturing overhead cost/Estimated direct materials costĮstimated manufacturing overhead cost/Estimated direct labor hours Next, calculate the predetermined overhead rate for the three companies above. The companies use different allocation bases when calculating their predetermined overhead rates. The operating and cost data are given next for three separate companies. Manufacturing overhead applied to products:Īctual machine hours used x Predetermined overhead rate AnswerĮstimated manufacturing overhead cost/Estimated machine hours Now, compute the predetermined overhead rate for 2021.ĭetermine the manufacturing overhead costs that Dorothy should have applied to her hats. The company actually had $300,000 in total manufacturing overhead costs for the year, and the actual machine hours used were 53,000. Example 2ĭorothy’s Hat Company computed a predetermined overhead rate based on annual machine hours.Īt the start of 2021, Dorothy’s Hat Company estimated that the total manufacturing overhead cost for the year would be $320,000, and the total machine hours would be 50,000 hours. The adjustment made to eliminate this difference at the end of the period is called the disposition of over or underapplied overhead. This means that the overhead that is applied to jobs or products is different than the actual overhead from the product or job. ![]() The formula used to compute the predetermined overhead rate uses estimates. The predetermined overhead rate for Ralph’s Machine Tools Company is: ![]() This information can be used to calculate the predetermined overhead rate.Įstimated manufacturing overhead cost/Estimated total units in the allocation base = Predetermined overhead rate The direct labor hours it expects for the upcoming year are 2,000. Ralph’s Machine Tools Company had an estimated manufacturing overhead cost of $15,000 for the upcoming year. Ralph’s Machine Tools Company assigns manufacturing overhead costs based on direct labor and applies this rate to job orders. Examples of Predetermined Overhead Rate Example 1 Now, let’s take a look at this formula in action with some examples. Predetermined Overhead Rate = Estimated Cost of Manufacturing Overhead / Estimated Activity Driver The predetermined overhead rate can be calculated by using the following formula: This rate is usually calculated at the start of an accounting period by dividing the cost of manufacturing overhead by the activity driver, which is also sometimes referred to as the activity base or allocation base.Ĭommon examples of activity drivers are machine hours, direct materials, or direct labor hours. A predetermined overhead rate is an allocation rate that is used to apply an estimated cost of manufacturing overhead to either products or job orders. ![]()
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