9SE - Horngren'S Financial And Managerial Accounting

Question

Computing standard overhead allocation rates

The following information relates to Morgan, Inc.’s overhead costs for the month:

Static budget variable overhead	\(7,800
Static budget fixed overhead	\)3,900
Static budget direct labor hours	1,300 hours
Static budget number of units	5,200 units

Morgan allocates manufacturing overhead to production based on standard direct labor hours. Compute the standard variable overhead allocation rate and the standard fixed overhead allocation rate.

Step-by-Step Solution

Answer

Standard variable overhead allocation rate: $6 per direct labor hour.

Standard fixed overhead allocation rate: $3 per direct labor hour.

Step 1: Definition of Direct Labor Cost

The cost incurred for all the employees directly attached to the production of the goods and services is known as direct labor cost. This cost depends upon the direct labor hours. 

Step 2: Standard variable overhead allocation rate

$\begin{array}{rcl}\mathbf{Standard}\mathbf{ }\mathbf{variable}\mathbf{ }\mathbf{overhead}\mathbf{ }\mathbf{allocation}\mathbf{ }\mathbf{rate}& \mathbf{=}& \frac{\mathbf{Static}\mathbf{ }\mathbf{budget}\mathbf{ }\mathbf{variable}\mathbf{ }\mathbf{overhead}}{\mathbf{Static}\mathbf{ }\mathbf{budget}\mathbf{ }\mathbf{direct}\mathbf{ }\mathbf{labor}\mathbf{ }\mathbf{hour}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{800}}{\mathbf{1}\mathbf{,}\mathbf{300}\mathbf{ }\mathbf{hours}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{6}\mathbf{ }\mathbf{per}\mathbf{ }\mathbf{direct}\mathbf{ }\mathbf{labor}\mathbf{ }\mathbf{hour}\end{array}$

Step 3: Standard fixed overhead allocation rate

$\begin{array}{rcl}\mathbf{Standard}\mathbf{ }\mathbf{fixed}\mathbf{ }\mathbf{overhead}\mathbf{ }\mathbf{allocation}\mathbf{ }\mathbf{rate}& \mathbf{=}& \frac{\mathbf{Static}\mathbf{ }\mathbf{budget}\mathbf{ }\mathbf{fixed}\mathbf{ }\mathbf{ovehead}}{\mathbf{Static}\mathbf{ }\mathbf{budget}\mathbf{ }\mathbf{direct}\mathbf{ }\mathbf{labor}\mathbf{ }\mathbf{hour}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{900}}{\mathbf{1300}\mathbf{ }\mathbf{hours}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{3}\mathbf{ }\mathbf{per}\mathbf{ }\mathbf{direct}\mathbf{ }\mathbf{labor}\mathbf{ }\mathbf{hour}\mathbf{ }\end{array}$