A manufacturing company has the following budgeted overhead costs: Indirect materials $0.50 per unit; Utilities $0.25 per unit; Supervisory salaries $60,000; Building rent $80,000. If the company expects to produce 200,000 units using 100,000 hours of direct labor, the standard overhead rate will be $____ per direct labor hour.

A manufacturing company has the following budgeted overhead costs: Indirect materials $0.50 per unit; Utilities $0.25 per unit; Supervisory salaries $60,000; Building rent $80,000. If the company expects to produce 200,000 units using 100,000 hours of direct labor, the standard overhead rate will be $____ per direct labor hour.

• A. $2.50
• B. $2.75
• C. $2.90
• D. $3.00

Answer: (C)

The concept here is to determine the standard overhead rate per direct labor hour by combining variable and fixed overhead costs and then allocating them over the standard direct labor hours. First, treat indirect materials and utilities as variable overhead. For 200,000 units, variable overhead equals (0.50 + 0.25) per unit = 0.75 per unit, totaling 200,000 × 0.75 = 150,000. Fixed overhead consists of supervisory salaries and building rent, totaling 60,000 + 80,000 = 140,000. Total overhead budget = 150,000 + 140,000 = 290,000. Divide this total by the standard direct labor hours, which are 100,000 hours, to get the standard overhead rate per direct labor hour: 290,000 / 100,000 = 2.90. So, the standard overhead rate is 2.90 per direct labor hour.

The concept here is to determine the standard overhead rate per direct labor hour by combining variable and fixed overhead costs and then allocating them over the standard direct labor hours.

First, treat indirect materials and utilities as variable overhead. For 200,000 units, variable overhead equals (0.50 + 0.25) per unit = 0.75 per unit, totaling 200,000 × 0.75 = 150,000.

Fixed overhead consists of supervisory salaries and building rent, totaling 60,000 + 80,000 = 140,000.

Total overhead budget = 150,000 + 140,000 = 290,000.

Divide this total by the standard direct labor hours, which are 100,000 hours, to get the standard overhead rate per direct labor hour: 290,000 / 100,000 = 2.90.

So, the standard overhead rate is 2.90 per direct labor hour.