Dallas Company uses a job order costing system. The company's executives estimated that direct labor would be $3,990,000 (190,000 hours at $21/hour) and that factory overhead would be $1,490,000 for the current period. At the end of the period, the records show that there had been 170,000 hours of direct labor and $1,190,000 of actual overhead costs. Using direct labor hours as a base, what was the predetermined overhead rate?

The predetermined overhead rate was $7.84

Explanation:

Predetermined overhead rate is calculated by dividing the Expected overhead by the Expected level of activity on which the overhead is applied. It is a rate at which the overhead is applied to a product / project/ department.

Predetermined overhead rate = Expected overhead / Expected activity

Predetermined overhead rate = Expected overhead / Expected direct labor hours

Predetermined overhead rate = $1,490,000 / 190,000

Predetermined overhead rate = $7.84 per labor hour

$7.84.

Explanation:

Predetermined overhead rate refers to the rate that is employed in applying manufacturing overhead to products, work-in-process inventory or job orders. The usual practice is to estimate at the start of each period using an activity driver, allocation base or activity base to divide the factory or manufacturing overhead. The activity driver, allocation base or activity base that usually employed are machine hours, direct labor hours, and among others.  

Since it is instructed in the question that direct labor hours should be used as the base, the predetermined overhead rate of Dallas Company can be calculated using the following formula:

Predetermined overhead rate = Estimated factory overhead ÷ Estimated direct labor hours

Since from the question,  

Estimated factory overhead = $1,490,000

Estimated direct labor hours = 190,000 hours

We can now substitute the values into the equation above and have:

Predetermined overhead rate = $1,490,000 ÷ 190,000 hours = $7.84210526315789 approximately $7.84

Therefore, Dallas Company’s predetermined overhead rate was $7.84.

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