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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 Preview

    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 = ...

    Solution Summary

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