Q14SE_a. - Horngren'S Financial And Managerial Accounting

Question

Question: Using job order costing in a service company

Assume that Roth’s accountants are expected to work a total of 8,000 direct labor hours in 2018. Roth’s estimated total indirect costs are $96,000 and the allocation base used is direct labor hours.

Requirements

1. What is Roth’s predetermined overhead allocation rate?

Step-by-Step Solution

Answer

Answer:

The predetermined overhead allocation rate of the company is $12.

Step 1: Service company

Service companies means the companies which are engaged in providing service activities to their clients. Professional services, legal services, etc. are considered as the service activities.

Step 2: Predetermined overhead allocation rate

$$\begin{gathered} \mathrm{Predetermined} \mathrm{overhead} \mathrm{allocation} \mathrm{rate}=\frac{\mathrm{Estimated} \mathrm{total} \mathrm{indirect} \mathrm{cost}}{\mathrm{Direct} \mathrm{labor} \mathrm{hours}} \\ =\frac{\$96,000}{8,000} \\ =\$12 \end{gathered}$$