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AccountingManagerial Accounting

Predetermined Overhead Rate Formula: Three Allocation Bases

Budgeted overhead divided by each budgeted activity base yields $3 per labor hour, 25% of labor cost, or $25 per machine hour.

Question

Green Bay Cheese Company budgets 375,000 dollars of overhead, 125,000 direct labor hours, 1,500,000 dollars of direct labor cost, and 15,000 machine hours. Determine a separate predetermined overhead rate for each allocation base:

  1. Direct labor hours.
  2. Direct labor dollars.
  3. Machine hours.

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Evidence boundary

This solution uses Green Bay Cheese Company in OpenStax Chapter 6, Exercise Set B, EB1. All four amounts are budget estimates. The three bases are independent alternatives; the question supplies no actual job activity or actual overhead for calculating applied overhead or a variance.