electricity used). Machine hours used would be a reasonable way to allocate overhead costs to products because use of machinery causes (or drives) overhead expenses. Vickers estimates that it will run its machines for 40,000 hours during the year. (1) Please provide the formula that would be used to calculate Vickers’ predetermined overhead rate and perform the calculation. Why is it necessary to calculate a predetermined overhead rate? (2) The calculation you used in the formula above should have included an activity base. Considering the different activity bases that could potentially be used, is it relevant that Vickers is described as a “highly automated” manufacturing plant? What might be the result
Assume that Vickers Manufacturing estimates it will spend $1 million on
(1) Please provide the formula that would be used to calculate Vickers’ predetermined overhead rate and perform the calculation. Why is it necessary to calculate a predetermined overhead rate?
(2) The calculation you used in the formula above should have included an activity base. Considering the different activity bases that could potentially be used, is it relevant that Vickers is described as a “highly automated” manufacturing plant? What might be the result if direct labor hours were used as the activity base (instead of machine hours) in a situation like this?
(3) Using the pre-determined overhead rate calculated above, calculate the overhead tha t would be allocated to a product that uses 3.5 hours of machine time. What will happen if actual overhead costs turn out to be higher or lower than this calculation?
Predetermined overhead rate is calculated at the beginning of each period. For that all manufacturing overhead will be estimated and suitable cost driver will be decided. Thereafter expenses will be allocated to the particular job on the basis of predetermined rate.
It is necessary to calculate predetermined overhead rate because on the basis of that all expenses could be easily allocate to different jobs it is less complicated.
It also helps in fixing a price of product before knowing actual expenses.
On the basis of predetermined rate actual expenses can be compared with estimated expenses. That may help in cost management.
If a business have a predetermined rate there books of accounts will always be prepared for use on time.
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