29) Johansen Corporation uses a predetermined overhead rate based on direct labor-hours to
apply manufacturing overhead to jobs. The Corporation has provided the following estimated
costs for the next year:
Ꮎ
Ꮎ
Ꮎ
Direct materials
Direct labor
Rent on factory building
Sales salaries
Depreciation on factory equipment
Indirect labor
Production supervisor's salary
Ꮎ
6,000
20,000
15,000
25,000
8,000
12,000
15,000
Ꮎ
Ꮎ
Ꮎ
Jameson estimates that 20,000 direct labor-hours will be worked during the year. The
predetermined overhead rate per hour will be:
A) $2.50 per direct labor-hour
B) $2.79 per direct labor-hour
C) $3.00 per direct labor-hour
D) $4.00 per direct labor-hour

Overhead is those costs required to run a business, but which cannot be directly attributed to any specific, for example, rent, factory overheads, depreciation, indirect labor and production supervisor's salary.

Total manufacturing overheads = Rent of factory building + Depreciation on factory equipment + Indirect labor + Production supervisor's salary

Total manufacturing overheads = $15,000 + $8,000 + $12,000 + $15,000

Total manufacturing overheads = $50,000

Total Direct labor hours in the year = 20,000

Predetermined Overhead Rate per labor hour = $50,000/20,000

Predetermined Overhead Rate per labor hour = $2.50 per direct labor hour

Note:

Sales salary is a selling expense and not a product cost hence it will not be included for calculating predetermined overhead rate.

Direct material and labor are direct expenses, they are product cost but not a part of Overhead cost.