The Work in Process inventory account of a manufacturing company shows a balance of $2,400 at the end of an accounting period. The job cost sheets of the two uncompleted jobs show charges of $400 and $200 for direct materials, and charges of $300 and $500 for direct labor. From this information, it appears that the company is using a predetermined overhead rate, as a percentage of direct labor costs, of:
A) 80%
B) 125%
C) 300%
D) 240%

Question

Quizplus · Accepted Answer

To find the predetermined overhead rate, we need to determine the total direct labor costs for the uncompleted jobs.

The total direct labor costs for the two uncompleted jobs are $300 + $500 = $800.

We can then use the formula:

Predetermined Overhead Rate = Estimated Overhead Costs / Estimated Direct Labor Costs

We don't have information on the estimated overhead costs, but we can use the Work in Process inventory balance as a proxy.

If the Work in Process inventory balance represents 125% of the total direct labor costs, then:

$2,400 = 1.25($800)

Solving for the predetermined overhead rate, we get:

Predetermined Overhead Rate = Estimated Overhead Costs / Estimated Direct Labor Costs 
Predetermined Overhead Rate = $3,000 / $800 
Predetermined Overhead Rate = 3.75 or 375%

Therefore, the best choice based on the information given is B) 125%.

The Work in Process Inventory Account of a Manufacturing Company