estimates it will spend $1 million on overhead expenses. Vickers is a highly automated manufacturing plant; therefore, the majority of its overhead expenses relate to machinery (depreciation, repairs and maintenance, 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?
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?
Predetermined overhead rate=
Estimated Manufacturing overhead/ cost driver
Here in given question Vickers is a highly automated manufacturing plant and the majority of overhead are related to machinery. Therefore machine hours can be used as cost driver to allocate the manufacturing overhead. Here predetermined overhead rate will be
=Estimated Overhead expenses/machine hours
=$1000000/40000 hours = $25 per machine hour
Overhead applied=
Predetermined overhead rate * machine hours for that job
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