Use the information below to answer the following questions.
Fingers Ltd, a graphic design service, has received an inquiry from a potential customer for a quotation for a webpage design. The pricing policy of the business is based on the budgeted financial data for the coming financial year. The data for the coming year is shown below: $$\begin{array} { l r }
\text { Sales } & \$ 550,000 \
\text { Direct materials } & 50,000 \
\text { Direct labour } & 300,000 \
\text { Variable overhead } & 5,000 \
\text { Advertising for business } & 5,000 \
\text { Depreciation on equipment } & 30,000 \
\text { Administration } & 27,000 \
\text { Interest } & 10,000 \
\text { Profit before tax } & 133,000
\end{array}$$ Other relevant information: Management has budgeted for 20,000 direct labour hours. Overhead is applied based on direct labour hours. An estimate for the direct costs of the job to be quoted on is shown below: $$\begin{array} { l r }
\text { Direct materials } & \$ 400 \
\text { Direct labour (100 hours) } & \$ 1,500
\end{array}$$
-Refer to the table above. The budgeted overhead recovery rate based on direct labour hours is:
A)$3.85 per DLH.
B)$5.60 per DLH.
C)$2.85 per DLH.
D)$5.85 per DLH.

Question

Use the information below to answer the following questions.
Fingers Ltd, a graphic design service, has received an inquiry from a potential customer for a quotation for a webpage design. The pricing policy of the business is based on the budgeted financial data for the coming financial year. The data for the coming year is shown below: $$\begin{array} { l r } 
\text { Sales } & \$ 550,000 \
\text { Direct materials } & 50,000 \
\text { Direct labour } & 300,000 \
\text { Variable overhead } & 5,000 \
\text { Advertising for business } & 5,000 \
\text { Depreciation on equipment } & 30,000 \
\text { Administration } & 27,000 \
\text { Interest } & 10,000 \
\text { Profit before tax } & 133,000
\end{array}$$ Other relevant information: Management has budgeted for 20,000 direct labour hours. Overhead is applied based on direct labour hours. An estimate for the direct costs of the job to be quoted on is shown below: $$\begin{array} { l r } 
\text { Direct materials } & \$ 400 \
\text { Direct labour (100 hours) } & \$ 1,500
\end{array}$$
-Refer to the table above. The budgeted overhead recovery rate based on direct labour hours is:
A)$3.85 per DLH.
B)$5.60 per DLH.
C)$2.85 per DLH.
D)$5.85 per DLH.

Quizplus · Accepted Answer

The budgeted overhead recovery rate is calculated by dividing the total overhead costs by the total direct labour hours. The total overhead costs include Variable overhead ($5,000) + Depreciation on equipment ($30,000) + Administration ($27,000) = $62,000. Dividing this by the budgeted direct labour hours (20,000 hours) gives $62,000 / 20,000 hours = $3.10 per direct labour hour (DLH). However, the correct calculation should consider all overheads relevant to the calculation, which seems to have been misunderstood in the initial explanation. Correctly, the overhead applied is based on direct labour hours, and if we consider only the variable overhead as relevant for this calculation (since fixed costs like depreciation and administration are not typically applied based on direct labour hours for pricing decisions in many costing models), we would divide $5,000 by 20,000 hours, resulting in $0.25 per DLH, which does not match any of the provided options. Given the options and the typical inclusion of all overheads in recovery rate calculations, it appears there was a mistake in the initial calculation explanation. The correct approach to find the overhead recovery rate would indeed involve dividing the sum of all overhead costs by the total direct labour hours, but without the correct sum provided in the initial explanation, the calculation was incorrect. The mistake was in the explanation of how to calculate the overhead recovery rate and which costs to include. Without the correct total overhead costs provided in the options or a clear indication of which costs to include, the calculation provided does not accurately answer the question based on standard accounting practices.

Use the Information Below to Answer the Following Questions Other Relevant Information: Management Has Budgeted for 20,000 Direct Labour