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Chapter 2 ACOB3

The document discusses how to compute a predetermined overhead rate using a four-step process. It involves estimating total overhead costs, the allocation base, and then using an equation to calculate the rate before a period begins. An example is provided to demonstrate the calculation.

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22 views3 pages

Chapter 2 ACOB3

The document discusses how to compute a predetermined overhead rate using a four-step process. It involves estimating total overhead costs, the allocation base, and then using an equation to calculate the rate before a period begins. An example is provided to demonstrate the calculation.

Uploaded by

shirardadiviso
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Compute predetermined overhead rate

Why Use an Allocation Base?

An allocation base, such as direct labor hours, direct labor dollars, or machine
hours, is used to assign manufacturing overhead to individual jobs.

We use an allocation base because:


a. It is impossible or difficult to trace overhead costs to particular jobs.

b. Manufacturing overhead consists of many different items ranging from the


grease used in machines to the production manager’s salary.

c. Many types of manufacturing overhead costs are fixed even though output
fluctuates during the period.

The predetermined overhead rate (POHR) used to apply overhead to jobs is


determined before the period begins.

Ideally, the allocation base is a cost driver that causes overhead.


Predetermined overhead rates that rely upon estimated data are often used
because:

1. Actual overhead for the period is not known until the end of the period, thus
inhibiting the ability to estimate job costs during the period.

2. Actual overhead costs can fluctuate seasonally, thus misleading decision


makers.

The predetermined overhead rate is computed before the period begins using a
four-step process.

1. Estimate the total amount of the allocation base (the denominator) that will be
required for next period’s estimated level of production.
2. Estimate the total fixed manufacturing overhead cost for the coming period and the
variable manufacturing overhead cost per unit of the allocation base.
3. Use the following equation to estimate the total amount of manufacturing
overhead:
Y = a + bX
Where,
Y = The estimated total manufacturing overhead cost
a = The estimated total fixed manufacturing overhead cost
b = The estimated variable manufacturing overhead cost
per unit of the allocation base
X = The estimated total amount of the allocation base
4. Compute the predetermined overhead rate
Yost Precision Machining estimates that it will require 40,000 direct labor-hours to meet
the coming period’s estimated production level. In addition, the company estimates total
fixed manufacturing overhead at $640,000, and variable manufacturing overhead costs of
$4.00 per direct labor hour.

Y = a + bX
Y = $640,000 + ($4.00 per direct labor-hour × 40,000 direct labor-hours)
Y = $640,000 + $160,000
Y = $800,000

POHR =$20.00 per direct labor-hour

Job WR53 at NW Fab, Inc. required $200 of direct materials and


10 direct labor hours at $15 per hour.Estimated total overhead for
The year was $760,000 and estimated direct labor hours were 20,000.
What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.

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