Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 32

Predetermined Overhead Rates

Refer to the data in Exercise 6-31. Compute the predetermined overhead rate assuming that Tiger Furnishings uses direct labor costs to allocate overhead costs.

Step 1 of 2

Predetermined overhead rate:

Manufacturing overhead costs are incurred for production of a product. Therefore, these costs should be included in the total cost of the product. However, these costs cannot be directly identified with a product. Thus, a predetermined manufacturing overhead rate is computed first by dividing the total estimated manufacturing overhead cost for a period by the total estimated allocation base for the period and then applied to products based on allocation base used by them.