Compton Company uses a predetermined overhead rate in applying overhead to production orders on a labour cost basis in Department A and on a machine hours basis in Department B. At the beginning of the most recently completed year, the company made the following estimates: $4,00015,000\begin{array} { | l | l | l | } \hline & \text { Dept. A } & \text { Dept. B } \\\hline \text { Direct labour cost } & \$ 56,000 & \$ 33,000 \\\hline \text { Factory overhead } & \$ 67,200 & \$ 45,000 \\\hline \text { Direct labour hours } & 8,000 & 9,000 \\\hline \text { Machine hours } & 4,000 & 15,000 \\\hline\end{array}$ What predetermined overhead rate would be used in Department A and Department B, respectively?

A) 83% and $3.
B) 120% and $3.
C) 81% and $3.
D) 83% and $5.

Question

Compton Company uses a predetermined overhead rate in applying overhead to production orders on a labour cost basis in Department A and on a machine hours basis in Department B. At the beginning of the most recently completed year, the company made the following estimates:

4,00015,000\begin{array} { | l | l | l | } \hline & \text { Dept. A } & \text { Dept. B } \\\hline \text { Direct labour cost } & \$ 56,000 & \$ 33,000 \\\hline \text { Factory overhead } & \$ 67,200 & \$ 45,000 \\\hline \text { Direct labour hours } & 8,000 & 9,000 \\\hline \text { Machine hours } & 4,000 & 15,000 \\\hline\end{array}

What predetermined overhead rate would be used in Department A and Department B, respectively?

A) 83% and $3.
B) 120% and $3.
C) 81% and $3.
D) 83% and $5.

Mohammed Muzaffar Shareef · Accepted Answer

Final Answer : B, Explanation :   The predetermined overhead rate for Department A is calculated as the total factory overhead divided by the total direct labor cost:   $ 67 , 200 $ 56 , 000 = 1.2 \frac{\$67,200}{\$56,000} = 1.2 $56 , 000 $67 , 200 ​ = 1.2   or 120%. For Department B, it's the total factory overhead divided by the total machine hours:   $ 45 , 000 15 , 000  hours = $ 3 \frac{\$45,000}{15,000 	ext{ hours}} = \$3 15 , 000  hours $45 , 000 ​ = $3   per machine hour.

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