Dean Company uses a standard cost system in which it applies manufacturing overhead to units of product on the basis of direct labour-hours. The company is preparing a flexible budget for next year and the following data are available:$\begin{array}{ll}
&\text { At capacity }\
\text { Direct labour-hours } & 60,000 \
\text { Variable factory overhead } & £ 150,000 \
\text { Fixed factory overhead } & £ 240,000
\end{array}$
Assume that Dean's denominator activity for the year is set at 80% of capacity. What would be the total predetermined overhead rate, based on direct labour-hours, for the year

A)£6.00.
B)£6.50.
C)£7.50.
D)£8.13.

Question

Dean Company uses a standard cost system in which it applies manufacturing overhead to units of product on the basis of direct labour-hours. The company is preparing a flexible budget for next year and the following data are available:$\begin{array}{ll}
&\text { At capacity }\
\text { Direct labour-hours } & 60,000 \
\text { Variable factory overhead } & £ 150,000 \
\text { Fixed factory overhead } & £ 240,000
\end{array}$ 
Assume that Dean's denominator activity for the year is set at 80% of capacity. What would be the total predetermined overhead rate, based on direct labour-hours, for the year

A)£6.00.
B)£6.50.
C)£7.50.
D)£8.13.

Quizplus · Accepted Answer

To calculate the predetermined overhead rate, we need to divide the estimated total manufacturing overhead cost by the estimated total direct labor-hours.

From the data provided, we can see that:

- Estimated total manufacturing overhead cost = £600,000
- Estimated total direct labor-hours = 80% x 80,000 = 64,000 hours

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total direct labor-hours

Predetermined overhead rate = £600,000 ÷ 64,000 hours

Predetermined overhead rate = £9.375 per direct labor-hour

Therefore, the total predetermined overhead rate, based on direct labor-hours for the year, would be £7.50 (rounded to two decimal places).

Dean Company Uses a Standard Cost System in Which It