Compute The Predetermined Overhead Allocation Rate Per Direct Labor Dollar
What is Predetermined Overhead Allocation Rate?
Predetermined overhead allocation rate is a rate that is applied to allocate the manufacturing overhead costs to the products manufactured. The rate is calculated by dividing the estimated overhead costs by the estimated allocation base.
Why is Predetermined Overhead Allocation Rate Important?
The predetermined overhead allocation rate is important because it helps in determining the cost of goods sold and the profitability of the products manufactured. It also helps in pricing the products and making decisions regarding the production process.
How to Compute the Predetermined Overhead Allocation Rate Per Direct Labor Dollar?
The formula for computing the predetermined overhead allocation rate per direct labor dollar is:
Predetermined Overhead Allocation Rate Per Direct Labor Dollar = Estimated Overhead Costs / Estimated Direct Labor Dollars
Where Estimated Overhead Costs are the total estimated manufacturing overhead costs for the period and Estimated Direct Labor Dollars are the total estimated direct labor dollars for the period.
Example
Assume that the estimated manufacturing overhead costs for the period are $100,000 and the estimated direct labor dollars are $50,000. The predetermined overhead allocation rate per direct labor dollar would be:
Predetermined Overhead Allocation Rate Per Direct Labor Dollar = $100,000 / $50,000 = $2
This means that for every dollar of direct labor, $2 of manufacturing overhead costs will be allocated to the products manufactured.
Conclusion
Computing the predetermined overhead allocation rate per direct labor dollar is an important step in determining the cost of goods sold and the profitability of the products manufactured. It is important to use realistic estimates for the overhead costs and the direct labor dollars to ensure that the predetermined overhead allocation rate is accurate.