The Watts Company uses predetermined overhead rates to apply manufacturing overhead to jobs. The predetermined overhead rate is based on labor cost in Dept. A and on machine-hours in Dept. B. At the beginning of the year, the company made the following estimates: Department A Department B
Direct labour cost $30,000 $40,000
Manufacturing overhead $60,000 $50,000
Direct labour hours 6,000 8,000
Machine hours 2,000 10,000

What predetermined overhead rates would be used in Departments A and B, respectively?

a. 50% and $8.00.
b. 50% and $5.00.
c. 110% and $15.00.
d. 200% and $5.00.

The Watts Company

d. 200% and $5.00.

Explanation:

a) Data and Calculations:

Estimates:

                                              Department A                  Department B

Direct labour cost                        $30,000                           $40,000

Manufacturing overhead            $60,000  LH                    $50,000  MH

Direct labour hours                         6,000                                8,000

Machine hours                                2,000                               10,000

Department A:

Manufacturing overhead rate = $60,000/$30,000 x 100 = 200%

Department B:

Manufacturing overhead rate = $50,000/10,000 = $5.00

The Watts Company Department A will absorb manufacturing overhead at a rate of 200% of direct labor cost in order to arrive at an estimate of $60,000 ($30,000 x 200%).  The Department B will absorb manufacturing overhead at a rate of $5 per machine hour to arrive at an estimate of $50,000 (10,000 x $5).

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