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:
- Direct labor hours.
- Direct labor dollars.
- Machine hours.
Answer
Use the predetermined overhead rate formula:
Green Bay Cheese Company uses the same $375,000 overhead budget with each base separately:
| Allocation base | Calculation | Predetermined rate |
|---|---|---|
| Direct labor hours | $375,000 ÷ 125,000 hours | $3 per direct labor hour |
| Direct labor dollars | $375,000 ÷ $1,500,000 | $0.25 per direct labor dollar (25%) |
| Machine hours | $375,000 ÷ 15,000 hours | $25 per machine hour |
The labor-dollar result is a ratio: apply 25% of the job's direct labor cost, not $0.25 per labor hour. The other two rates are dollars per hour of their respective activities.
These are alternative allocation bases, not three overhead charges to add to the same job. Each would distribute the $375,000 budget across the corresponding budgeted activity total. Actual job activity is multiplied by the selected predetermined rate when overhead is applied; actual overhead expenditure does not replace the budget in this rate calculation.
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.
Sources
These references support the concepts and methods used in the explanation above.