Oldham Corporation bases its predetermined overhead rate on variable manufacturing overhead cost of $4.00 per machine-hour and fixed manufacturing overhead cost of $87,822 per period. If the denominator level of activity is 4,100 machine-hours, the fixed component in the predetermined overhead rate would be:
A)$25.42
B)$4.00
C)$21.42
D)$400.00

Question

Quizplus · Accepted Answer

The predetermined overhead rate is calculated as follows:

Predetermined overhead rate = (Total manufacturing overhead cost) ÷ (Total estimated activity level)

Total manufacturing overhead cost = Variable manufacturing overhead cost + Fixed manufacturing overhead cost

Total manufacturing overhead cost = $87,822 + ($4.00 × 4,100 machine-hours) = $105,622

Predetermined overhead rate = $105,622 ÷ 4,100 machine-hours = $25.74 per machine-hour

Therefore, the fixed component in the predetermined overhead rate is $25.74 - $4.00 = $21.74, which is closest to option C, $21.42.

Oldham Corporation Bases Its Predetermined Overhead Rate on Variable Manufacturing