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 labour. From this information, it appears that the company is using a predetermined overhead rate, as a percentage of direct labour costs, of:
A)80%.
B)125%.
C)300%.
D)240%.

Question

Quizplus · Accepted Answer

The total direct materials cost is $400 + $200 = $600, and the total direct labor cost is $300 + $500 = $800. The total costs for the uncompleted jobs are $600 (materials) + $800 (labor) = $1400. Given that the Work in Process inventory shows a balance of $2400, the difference of $1000 ($2400 - $1400) must be the applied overhead. The predetermined overhead rate, based on direct labor, is calculated as ($1000 overhead / $800 direct labor) = 1.25 or 125%.

The Work in Process Inventory Account of a Manufacturing Company