Jones Company applies overhead based on direct labor hours. At beginning of the year, Jones estimates overhead to be $480,000, machine hours to be 120,000, and direct labor hours to be 80,000. During January, Jones has 6,700 direct labor hours and 11,000 machine hours. What is the predetermined overhead rate?

a. $6 per direct labor hour
b. $40.200
C.$4 per machine hour
d.$44,000
e. none of these 10.

a. $6 per direct labor hour

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 = $480,000 / 80,000

Predetermined overhead rate = $6 per direct labor hour

The predetermined overhead rate is a. $6 per direct labor hour

Explanation:

Overheads are included in the Product cost at Budgeted Rate multiplied by Actual Activity. This is normally known as application of Manufacturing Overhead.

Budgeted Rate is also known as Predetermined Overheads rate and is calculated as follows:

Total Budgeted Overhead Cost / Total Budgeted Activity

Note that Jones Company applies overhead based on direct labor hours. Thus the Budgeted Activity is Estimated direct labor hours

Thus Predetermined Overheads rate = $480,000/ 80,000

                                                              = $ 6 per direct labor hour

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