The Work in Process inventory account of a manufacturing firm shows a balance...
The Work in Process inventory account of a manufacturing firm shows a balance of $3,000 at the...Question:The Work in Process inventory account of a manufacturing firm shows a balance of $3,000 at the end of an accounting period. The job cost sheets of two uncompleted jobs show charges of $500 and $300 for direct materials, and charges of $400 and $600 for direct labor. From this information, it appears that the company is using a predetermined overhead rate, as a percentage of direct labor costs of:A. 83%B. 120%C. 40%D. 300%
Predetermined Overhead Rate:The predetermined overhead is used to allocate the cost of manufacturing overhead to a certain cost object. This rate is composed of an estimated manufacturing overhead based on a certain activity like direct labor hours and machine setups.
Answer and Explanation:The correct answer is B. 120%.Let us determine the total manufacturing overhead. Here, we subtract the direct materials ($500 and $300) and the direct labor ($400 and $600) from the ending work in process ($3,000). The total manufacturing overhead is $1,200.
[*]Total manufacturing overhead = $3,000 - ($500 + $300 + $400 + $600) = $1,200
Next, we add the direct labor of the two jobs to get the total direct labor cost. The total direct labor cost is $1,000.
[*]Total direct labor = $400 + $600 = $1,000
To determine the predetermined overhead rate in percentage, we divide the total manufacturing overhead ($1,200) by the total direct labor ($1,000). The predetermined overhead rate is 120%.
[*]Predetermined overhead rate = $1,200 / $1,000 = 1.2 or 120%.
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