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Predetermined Overhead Rate and Allocation Base

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Showers Company estimates the following overhead costs for the coming year:
Equipment depreciation $150,000
Equipmetn maintanence 50,000
Supervisory salary 20,000
Factory rent 200,000
TOTAL 420,000

Showers is also budgeting $600,000 in direct labor costs and 14,000 machine hours for the coming year.

A) Calculate the predetermined overhead rate using direct labor costs as the allocation base.

B) Calculate the predetermined overhead rate using machine hour as the allocation base.

C) Which of the allocation bases is preferred? Why?

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Solution Summary

The solution calculates the predetermined rates and which allocation bases is preferred.

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a)
The total overhead costs is given in the problem as = $420,000
Direct labor costs are given as = $600,000
Hence, the overhead allocation rate is = ...

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