The factory overhead costs (maintenance department) are allocated to products based on the number of hours of maintenance use by each product line. The maintenance department has fixed costs of 500,000 and variable costs of 25 per hour of maintenance provided. The variable costs include the salaries of the maintenance workers. More maintenance workers can be added if greater maintenance is demanded by the other departments without affecting the fixed costs of the maintenance department. The maintenance department expects to provide 20000 hours of maintenance.
a) What is the predetermined overhead application rate for the maintenance department?
b) What is the additional cost to the maintenance department of providing another hour of maintenance?
c) What problem exists if the product line managers can choose how much maintenance to be performed?
This solution calculation demonstrates the use of predetermined manufacturing overhead application rates to make decisions.