Chapter 19, Problem 1TI

The Santos Shirt Company manufactures shirts in two departments: Cutting and Sewing. The company allocates manufacturing overhead using a single plantwide rate with direct labor hours as the allocation base. Estimated overhead costs for the year are $500,000, and estimated direct labor hours are 200,000. In June, the company incurred 17,500 direct labor hours.

Compute the predetermined overhead allocation rate.

To determine

Calculate predetermined overhead allocation rate for Company S.

Explanation of Solution

Predetermined Overhead Rate: Predetermined overhead rate is a measure used to allocate the estimated manufacturing overhead cost to the products or job orders during a particular period. This is generally evaluated at the beginning of each reporting period. The evaluation takes into account the estimated manufacturing overhead cost and the estimated allocation base that includes direct labor hours, direct labor in dollars, machine hours and direct materials.

Calculate predetermined overhead allocation rate.

$\begin{array}{c}\begin{array}{l}\text{Predetermined overhead}\\ \text{ allocation rate}\end{array})\text{ =}\frac{\text{Total estimated overhead costs}}{\text{Total estimated quantity of the overhead allocation base}}\\ =\frac{\$500,000}{200,000\text{direct labor hours}}\\ =\$2.50\text{per direct labor hour}\end{array}$

Therefore, predetermined overhead allocation rate is $2.50 per direct labor hour.