Oltman Corporation uses a predetermined overhead rate based on machine-hours to apply manufacturing overhead to jobs. The Corporation has provided the following estimated costs for next year: Direct materials $25,000
Direct labor $22,000
Advertising expense $15,000
Rent on factory building $13,500
Sales salaries $28,000
Depreciation on factory equipment $6,500
Indirect materials $10,000
Insurance on factory equipment $12,000
Oltman estimated that 40,000 direct labor-hours and 20,000 machine-hours would be worked during the year. The predetermined overhead rate per machine-hour will be:
a) $1.05 per machine hour
b) $1.00 per machine hour
c) $2.10 per machine hour
d) $1.60 per machine hour

Predetermined manufacturing overhead rate= $2.1 per machine hour

Explanation:

First, we need to calculate the estimated total overhead:

Total estimated overhead= Rent on factory building + Depreciation on factory equipment + Indirect materials + Insurance on factory equipment

Total estimated overhead= 13,500 + 6,500 + 10,000 + 12,000

Total estimated overhead= $42,000

To calculate the predetermined manufacturing overhead rate we need to use the following formula:

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Predetermined manufacturing overhead rate= 42,000 / 20,000

Predetermined manufacturing overhead rate= $2.1 per machine hour

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