Edmonton Pools manufactures swimming pool equipment. Edmonton estimates total manufacturing overhead costs next year to be $ 1,400,000. Edmonton also estimates it will use 50,000 direct labor hours and incur $ 1,000,000 of direct labor cost next year. In addition, the machines are expected to be run for 40,000 hours. Compute the predetermined manufacturing overhead rate for next year under the following independent situations:

(1) Assume that the company uses direct labor hours as its manufacturing overhead allocation base.
(2) Assume that the company uses direct labor cost as its manufacturing overhead allocation base.
(3) Assume that the company uses machine hours as its manufacturing overhead allocation base.

1. $28 per Direct Labor Hour

2. 140% of Direct Labor Cost

3. $35 per Machine Hour

Explanation:

(1) Predetermined manufacturing overhead rate:

= Total estimated amount of a Manufacturing Overhead ÷ Total estimated Direct Labor Hours

= $1,400,000 ÷ 50,000

= $28 per Direct Labor Hour

(2) Predetermined manufacturing overhead rate:

= (Total estimated amount of a Manufacturing Overhead ÷ Total estimated Direct Labor Cost) × 100

= ($1,400,000 ÷ $1,000,000) × 100

= 140% of Direct Labor Cost

(3) Predetermined manufacturing overhead rate:

= Total estimated amount of a Manufacturing Overhead ÷ Total estimated Machine Hours

= $1,400,000 ÷ 40,000

= $35 per Machine Hour

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