Reformer Company estimates that 64,000 direct labor hours will be worked and 80,000 machine hours will be incurred during the year. In addition, the company has developed the following cost estimates for next year:

Reformer Company data
Sales commissions 600,000
Direct labor 440,000
Salary of production supervisor 280,000
Rent on factory equipment 128,000
Direct materials 120,000
Advertising expense 88,000
Indirect materials 40,000

If overhead is applied on the basis of direct labor hours, what is the company’s predetermined overhead rate?

Question

Reformer Company estimates that 64,000 direct labor hours will be worked and 80,000 machine hours will be incurred during the year. In addition, the company has developed the following cost estimates for next year:

Reformer Company data
Sales commissions	600,000
Direct labor	440,000
Salary of production supervisor	280,000
Rent on factory equipment	128,000
Direct materials	120,000
Advertising expense	88,000
Indirect materials	40,000

If overhead is applied on the basis of direct labor hours, what is the company’s predetermined overhead rate?

BlackTom AI · Accepted Answer

Manufacturing overhead applied per direct labor hour = total estimated manufacturing (factory) overhead divided by estimated direct labor hours.

1. Relevant concepts
- Manufacturing overhead (factory overhead) includes indirect production costs: indirect materials, rent on factory equipment, salaries of production supervisors, depreciation of factory assets, etc.
- Excluded from overhead are direct production costs (direct materials, direct labor) and selling/admin expenses (sales commissions, advertising).
- Predetermined overhead rate = Estimated total manufacturing overhead / Estimated activity base (direct labor hours).

2. Identify which cost items are overhead
From the data:
- Salary of production supervisor = $280,000 → factory overhead
- Rent on factory equipment = $128,000 → factory overhead
- Indirect materials = $40,000 → factory overhead
Not overhead: Direct labor ($440,000), Direct materials ($120,000) are product costs but not overhead; Sales commissions ($600,000) and Advertising ($88,000) are selling expenses.

3. Complete calculation (showing intermediate steps)
- Sum estimated manufacturing overhead:
  280,000 (supervisor) + 128,000 (factory rent) + 40,000 (indirect materials)
  = 280,000 + 128,000 = 408,000
  408,000 + 40,000 = 448,000 total estimated overhead
- Estimated direct labor hours = 64,000 DLH
- Predetermined overhead rate = 448,000 / 64,000 = 7.00 per DLH

4. Why this answer is correct
All three factory-related costs were included, producing a total overhead of $448,000. Dividing by the 64,000 estimated direct labor hours yields $7.00 per DLH, which is the correct application base specified in the question.

5. Why the other options are incorrect
- $4.38/DLH ≈ 280,320 total overhead (includes only supervisor salary, ignoring factory rent and indirect materials).
- $5.00/DLH corresponds to $320,000 overhead (supervisor + indirect materials = 280,000 + 40,000), omitting factory rent.
- $6.38/DLH corresponds to ≈ $408,320 (supervisor + factory rent = 280,000 + 128,000), omitting indirect materials.
Each wrong choice omits one or more factory overhead components.

6. Conclusion
Therefore, the predetermined overhead rate is $7.00 per direct labor hour, matching the provided correct answer.

类似问题

PA 2 - What is the predetermined overhead rate if direct labor hours are considered the cost driver?

EA 7 - What was the predetermined overhead rate using direct labor hours?

Which of the following correctly describes the predetermined manufacturing overhead rate?

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