PREDETERMINED OVERHEAD RATES

I. Ethical Corp. estimates that its production for the coming year will be 10,000 units, which is
80% of normal capacity, with the following unit costs: materials, P40; direct labor, P60. Direct
labor is paid at the rate of P24 per hour. The most expensive piece of machinery, must be run
for 20 minutes to produce one unit. Total estimated overhead is expected to consist of
P400,000 for variable overhead and P400,000 for fixed overhead.
Required: Compute the overhead rate for each of the following bases, using the normal
capacity activity level: 12,500 u normal capacity (Round answers to the nearest peso or
percentage)

(1)physical output
P 800,000 / 12,500 u = P 64 overhead per unit

(2)materials cost
[P 800,000 / (P 40 x 12,500 u)] x 100 = 160%

(3)direct labor cost

[P 800,000 / (P 60 x 12,500 u)] x 100 = 107%

(4)direct labor hours

P 60 / P 24 = 2.5 direct labor hours per unit
2.5 direct labor hours per unit x 12,500 u = 31,250 estimated direct labor hours

P 800,000 / 31,250 hours = P 25.6 per direct labor hour

(5)machine hours
20 minutes per unit / 60 minutes in an hour = 1/3 per machine hour
1/3 hour per unit x 12,500 u = 4,167 estimated machine hours

P 800,000 / 4,167 = P 192 per machine hour

II. Values, Inc. manufactures audio equipment. The company estimates the following costs at
normal capacity and other items for the coming period:
Direct materials ............................................................................... P300,000
Direct labor ..................................................................................... 520,000
Factory overhead (fixed) ................................................................. 300,000
Factory overhead (variable) ............................................................ 240,000
Normal capacity .............................................................................. 100,000 direct labor hours
Expected production ....................................................................... 80,000 direct labor hours

Required: Compute the overhead application rate using both the normal capacity and the
expected actual capacity activity levels

1) Fixed overhead per direct labor hour

At normal capacity level: 300,000 fixed overhead / 100, 000 direct

labor hours
=P3

At expected actual capacity activity level: 300,000 fixed overhead / 80, 000 direct
labor hours
= P 3.75
2) Variable overhead per direct labor hour

At normal capacity level: 240,000 variable overhead / 100, 000

direct labor hours
= P 2.40

At expected actual capacity activity level: 80,000/100,000 = 80%

80% x 240,000 var overhead = 192,000
variable overhead

192,000 variable overhead / 80, 000 direct

labor hours
= P 2.40

3) Total overhead per direct labor hour At normal capacity At expected actual
level capacity activity
level
Fixed overhead per direct labor hour 3 3.75
Variable overhead per direct labor hour 2.40 2.40
TOTAL 5.40 6.15
III. Data for the past two years for Behavior Corp. are:
 20A 20B
Units produced....................................................................................... 10,000 11,000
Overhead applied per unit ..................................................................... P 15 P 18
Actual overhead:
Fixed ................................................................................................. 50,000 55,000
Variable............................................................................................. 95,000 150,000
Estimated overhead:
Fixed ................................................................................................. 50,000 56,000
Variable............................................................................................. 130,000 142,000
The company determines overhead rates based on estimated units to be produced.

Required:
(1) Determine the estimated units of production used to obtain the overhead allocation
rates in 20A and 20B.

Estimated overhead / estimated units of production = overhead per unit

20A:
50,000 + 130,000 / x = P 15
P 15 (x) = 180,000
15x / 15 = 180,000 / 15

x = 12,000 estimated units of production

20B:
56,000 + 142,000 / x = P 18
P 18 (x) = P 198,000
18x / 18 = 198,000 / 18

x = 11,000 estimated units of production

(2) Determine the over- or underapplied factory overhead for each of the two years.

20A
Actual Factory Overhead 145,000
Applied Factory Overhead (10,000 x 15) 150,000
Overapplied Factory Overhead (5,000)

20B
Actual Factory Overhead 205,000
Applied Factory Overhead (11,000 x 18) 198,000
Underapplied Factory Overhead 7,000
IV. To determine an overhead application rate for its Machining and Assembly Departments,
the management of EQ Co. requested the following overhead cost data for June:
 Machining Assembly
Item Department Department Total
Number of employees ............................................... 60 40 100
Square footage ........................................................... 15,000 10,000 25,000
Monthly average wage per employee
(direct and indirect) ............................................ P 2,000 P 2,500 --
Overhead directly chargeable to
department (excluding indirect labor) ................ P90,000 P75,000 P165,000
Materials used ........................................................... 60,000 90,000 150,000
Factory rent ................................................................ ? ? 33,000
Other building costs ................................................... ? ? 60,000
Payroll Department cost ............................................ ? ? 18,000
Freight-in and other Receiving
Department costs................................................ ? ? 75,000

In each department, 80% of the employees are direct laborers. Overhead is charged to
production on the basis of direct labor cost. The allocation basis for other data is as follows: all
building costs, square footage; Payroll Department cost, number of employees; freight-in and
other Receiving Department costs, materials used.

Machining Assembly
Department Department
Overhead directly chargeable 90,000 75,000
Indirect labor:
20% x 60 x 2,000 24,000
20% x 40 x 2,500 20,000
Factory rent:
33,000 x (15,000 / 25,000) 19,800
33,000 x (10,000 / 25,000) 13,200
Other building costs:
60,000 x (15,000 / 25,000) 36,000
60,000 x (10,000 / 25,000) 24,000
Payroll Department Cost
18,000 x (60 / 100) 10,800
18,000 x (40 / 100) 7,200
Freight-in and other Receiving Department costs:
75,000 x (60,000 / 150,000) 30,000
75,000 x (90,000 / 150,000) 45,000
Total overhead P 210,600 P 184,400

Direct labor costs:

80% x 60 x 2,000 P 96,000
80% x 40 x 2,500 P 80,000
 Machining Assembly
Department Department

Overhead as a percentage of direct labor cost: OVERHEAD APPLICATION

RATES
210,600 / 96,000 219%
184,400 / 80,000 231%