Skip to main content
Sign in Create a free account
Varsity Tutors
Sign in

Predetermined Overhead Rate (POR) - Cost Accounting

  1. For a particular job, Gemini Corp. incurred $4,000 in direct material costs and $6,000 in direct labor costs. The job required 300 machine hours to complete. The company's budget for the year included total manufacturing overhead of $500,000, total direct labor costs of $800,000, and total machine hours of 20,000. Gemini uses machine hours as its allocation base. What is the total manufacturing cost of this job?
    Answer: $17,500 First, calculate the POR using the specified allocation base (machine hours). POR = Estimated MOH / Estimated Machine Hours = $500,000 / 20,000 MH = $25 per MH. Second, apply this overhead to the job. Applied OH = $25/MH * 300 MH = $7,500. Third, calculate the total manufacturing cost of the job, which is the sum of direct materials, direct labor, and applied manufacturing overhead. Total Job Cost = DM + DL + Applied MOH = $4,000 + $6,000 + $7,500 = $17,500.
  2. The total manufacturing cost for Job #123 was $8,400. Direct materials charged to the job were $2,000. The company applies manufacturing overhead at a rate of 150% of direct labor cost. What was the amount of manufacturing overhead applied to Job #123?
    Answer: $3,840 This problem requires algebra. Total Manufacturing Cost = Direct Materials (DM) + Direct Labor (DL) + Manufacturing Overhead (MOH). We are given: $8,400 = $2,000 + DL + MOH. We also know that MOH = 1.5 DL. We can substitute this into the first equation: $8,400 = $2,000 + DL + (1.5 DL). This simplifies to $6,400 = 2.5 DL. Solving for DL: DL = $6,400 / 2.5 = $2,560. The question asks for the MOH applied, not the DL cost. MOH = 1.5 DL = 1.5 * $2,560 = $3,840.
  3. At the start of the year, a company established its predetermined overhead rate based on $800,000 of estimated overhead and 50,000 estimated machine hours. In June, a major new customer order caused the company to revise its annual estimates to $900,000 of overhead and 60,000 machine hours. For the year, the company's actual results were 58,000 machine hours. What is the total overhead applied for the year?
    Answer: $928,000 The predetermined overhead rate is established at the beginning of the year and is used throughout the year to maintain consistency. It is not changed mid-year due to revised estimates. The original POR = $800,000 / 50,000 MH = $16.00 per MH. This rate is applied to the actual machine hours for the year. Applied Overhead = POR Actual Activity = $16.00/MH 58,000 MH = $928,000. The revised estimates and other data are distractors.
  4. A company is considering switching its overhead allocation base from 40,000 estimated direct labor hours to 25,000 estimated machine hours. Total estimated overhead is $200,000. A particular product, Job #88, requires 8 direct labor hours and 6 machine hours. What would be the difference in overhead allocated to Job #88 if the company switches from the direct labor hour base to the machine hour base?
    Answer: $8.00 increase Step 1: Calculate the POR under both methods. DLH POR = $200,000 / 40,000 DLH = $5.00 per DLH. MH POR = $200,000 / 25,000 MH = $8.00 per MH. Step 2: Apply both rates to Job #88. OH on DLH basis = $5.00 8 DLH = $40. OH on MH basis = $8.00 6 MH = $48. Step 3: Find the difference. The switch results in an increase of $48 - $40 = $8.00.
  5. A company budgeted $450,000 of manufacturing overhead and 30,000 direct labor hours. Actual results were $472,000 of manufacturing overhead and 32,000 direct labor hours. A specific job completed during the period required 50 direct labor hours. How much more or less overhead would be allocated to this job if an actual overhead rate had been used instead of a predetermined rate?
    Answer: $12.50 less would be allocated First, calculate the overhead allocated using the predetermined rate (Normal Costing). Predetermined Rate = Budgeted MOH / Budgeted DLH = $450,000 / 30,000 DLH = $15.00 per DLH. Overhead applied to the job = $15.00 50 DLH = $750.00. Second, calculate the overhead that would be allocated using an actual rate (Actual Costing). Actual Rate = Actual MOH / Actual DLH = $472,000 / 32,000 DLH = $14.75 per DLH. Overhead allocated to the job on this basis = $14.75 50 DLH = $737.50. The difference is $750.00 - $737.50 = $12.50. Therefore, $12.50 less would be allocated using an actual rate.
  6. A company has a theoretical capacity of 100,000 machine hours and a practical capacity of 80,000 machine hours per year. Budgeted annual manufacturing overhead is $500,000. The company's policy is to base its predetermined overhead rate on practical capacity. During the year, the company actually worked 78,000 machine hours. What was the total overhead applied during the year?
    Answer: $487,500 First, calculate the predetermined overhead rate using the specified capacity level. The policy is to use practical capacity. POR = Budgeted MOH / Practical Capacity = $500,000 / 80,000 MH = $6.25 per MH. The theoretical capacity is irrelevant information. Second, apply this rate to the actual machine hours worked. Applied Overhead = POR Actual MH = $6.25 78,000 MH = $487,500.
  7. Hydra Corp. plans to produce 80,000 units of its product next year. Each unit requires 0.25 machine hours to produce. Budgeted manufacturing overhead for the year is $300,000. The company uses machine hours as its overhead allocation base. What is the predetermined overhead rate per machine hour?
    Answer: $15.00 This is a two-step problem. First, calculate the total estimated amount of the allocation base (machine hours). Total Estimated MH = 80,000 units * 0.25 MH/unit = 20,000 MH. Second, use this to calculate the predetermined overhead rate. POR = Estimated MOH / Estimated MH = $300,000 / 20,000 MH = $15.00 per machine hour. A common error is to divide the overhead by the number of units, which would give $3.75.
  8. Vanguard Machining applies overhead based on machine hours. The company's predetermined overhead rate is $22 per machine hour. During July, the company applied $187,000 in manufacturing overhead to its jobs. The company had budgeted 8,000 machine hours for July, but actual manufacturing overhead costs were $190,000. How many actual machine hours were worked in July?
    Answer: 8,500 hours The formula for applied overhead is: Applied OH = POR * Actual Activity. We are given the Applied OH ($187,000) and the POR ($22 per machine hour). We can solve for the actual machine hours: Actual Machine Hours = Applied OH / POR = $187,000 / $22 = 8,500 hours. The budgeted hours (8,000) and actual overhead cost ($190,000) are distractors.
  9. Midwest Manufacturing uses a predetermined overhead rate based on direct labor hours. At the beginning of the year, the company estimated total manufacturing overhead costs of $840,000 and 21,000 direct labor hours. During the year, actual manufacturing overhead was $856,200 and actual direct labor hours were 20,600. If Job #347 required 150 direct labor hours, what amount of manufacturing overhead was applied to this job?
    Answer: $6,000 The predetermined overhead rate is calculated using budgeted amounts: $840,000 ÷ 21,000 hours = $40 per direct labor hour. Applied overhead for Job #347 = 150 hours × $40 = $6,000. Choice B incorrectly uses actual overhead divided by estimated hours ($856,200 ÷ 21,000 = $40.80). Choice C incorrectly uses actual overhead divided by actual hours ($856,200 ÷ 20,600 = $41.56). Choice D incorrectly uses estimated overhead divided by actual hours ($840,000 ÷ 20,600 = $40.78).
  10. Over the last two years, Caspian Corp. has observed the following manufacturing overhead costs at two activity levels. In Year 1, at 10,000 machine hours, costs were $180,000. In Year 2, at 15,000 machine hours, costs were $230,000. The company plans to operate at 12,000 machine hours in the upcoming year and will use the high-low method to create a cost formula. What will be the predetermined overhead rate for the upcoming year?
    Answer: $17.50 per machine hour This is a multi-step problem. First, use the high-low method to find the cost formula. Variable rate = (High Cost - Low Cost) / (High Activity - Low Activity) = ($230,000 - $180,000) / (15,000 - 10,000) = $50,000 / 5,000 MH = $10 per MH. Fixed cost = Total Cost - Variable Cost = $230,000 - ($10 15,000) = $80,000. Second, use this formula to estimate total MOH for the budgeted activity level of 12,000 MH. Estimated MOH = $80,000 + ($10 12,000) = $210,000. Third, calculate the POR. POR = Estimated MOH / Estimated Activity = $210,000 / 12,000 MH = $17.50 per machine hour.
  11. Triton Industries uses a flexible budget to estimate its manufacturing overhead costs, with the formula: Total MOH = $200,000 + $5.00 per direct labor hour. The company expects to operate at 80,000 direct labor hours for the upcoming year. What is the predetermined overhead rate per direct labor hour?
    Answer: $7.50 First, calculate the total estimated MOH at the expected activity level. Total Estimated MOH = $200,000 + ($5.00 * 80,000 DLH) = $200,000 + $400,000 = $600,000. Second, calculate the POR by dividing the total estimated MOH by the estimated activity level. POR = $600,000 / 80,000 DLH = $7.50 per DLH.
  12. Central Manufacturing applies overhead using a predetermined rate of 150% of direct labor cost. During March, three jobs were worked on: Job 101 with direct labor cost of $8,400; Job 102 with direct labor cost of $12,600; and Job 103 with direct labor cost of $6,200. Jobs 101 and 103 were completed and sold, while Job 102 remains in Work-in-Process. What amount of applied overhead should be included in Cost of Goods Sold for March?
    Answer: $21,900 When you encounter overhead application problems, focus on two key steps: calculating total applied overhead, then determining which portion flows to Cost of Goods Sold based on job completion status. First, calculate applied overhead for each job using the predetermined rate of 150% of direct labor cost: - Job 101: $8,400×1.50=$12,600\$8,400 \times 1.50 = \$12,600 - Job 102: $12,600×1.50=$18,900\$12,600 \times 1.50 = \$18,900 - Job 103: $6,200×1.50=$9,300\$6,200 \times 1.50 = \$9,300 The critical insight is that only completed and sold jobs affect Cost of Goods Sold. Since Jobs 101 and 103 were completed and sold, their applied overhead totals $12,600+$9,300=$21,900\$12,600 + \$9,300 = \$21,900, making C correct. Here's why the other answers miss the mark: Answer A ($18,900) represents only Job 102's applied overhead, but this job remains in Work-in-Process and doesn't impact Cost of Goods Sold yet. Answer B (40,800)incorrectlyaddsallthreejobs′appliedoverhead(40,800) incorrectly adds all three jobs' applied overhead ($12,600+$18,900+$9,300\$12,600 + \$18,900 + \$9,300$), ignoring that Job 102 hasn't been completed and sold. Answer D ($22,800) appears to be a calculation error, possibly confusing direct labor costs with applied overhead amounts. Remember this key distinction: applied overhead follows the physical flow of jobs. Overhead for incomplete jobs stays in Work-in-Process inventory, while overhead for completed and sold jobs moves to Cost of Goods Sold. Always check job status before determining where costs belong on the financial statements.
  13. Southwest Fabrication calculated a predetermined overhead rate of $35 per machine hour based on estimated overhead of $875,000. During the year, 24,500 machine hours were actually used, and actual overhead costs were $847,500. At year-end, the Applied Overhead account shows a balance of $857,500. What was the estimated machine hour capacity used to calculate the predetermined overhead rate?
    Answer: 25,000 machine hours This question tests your understanding of predetermined overhead rates and the relationship between estimated costs, estimated activity levels, and the calculated rate itself. When you see a predetermined overhead rate problem, remember the fundamental formula: Predetermined OH Rate=Estimated Overhead CostsEstimated Activity Level\text{Predetermined OH Rate} = \frac{\text{Estimated Overhead Costs}}{\text{Estimated Activity Level}} To find the estimated machine hour capacity, you need to rearrange this formula: Estimated Activity Level=Estimated Overhead CostsPredetermined OH Rate\text{Estimated Activity Level} = \frac{\text{Estimated Overhead Costs}}{\text{Predetermined OH Rate}} Substituting the given values: Estimated Machine Hours=$875,000$35 per machine hour=25,000 machine hours\text{Estimated Machine Hours} = \frac{\$875,000}{\$35 \text{ per machine hour}} = 25,000 \text{ machine hours} The correct answer is B) 25,000 machine hours. Now let's examine why the other options are incorrect. Choice A (24,214) might result from incorrectly dividing actual overhead costs ($847,500) by the predetermined rate ($35). Choice C (24,500) is a trap—this represents the actual machine hours used during the year, not the estimated capacity used in the rate calculation. Choice D (25,071) could come from dividing the applied overhead balance ($857,500) by the predetermined rate. The key insight is that predetermined overhead rates are calculated at the beginning of the period using estimates, regardless of what actually happens during the year. When solving predetermined overhead rate problems, always identify which figures are estimates (used in rate calculation) versus actual results (used for variance analysis). Focus on the estimated amounts when working backward to find the original capacity assumption.
  14. Metro Manufacturing has two production departments. Department A applies overhead at $12 per machine hour, and Department B applies overhead at 200% of direct labor cost. Job #456 required 150 machine hours in Department A and 80 direct labor hours at $18 per hour in Department B. Additionally, Job #456 required 45 machine hours in Department B, but Department B only tracks direct labor cost for overhead application. What is the total overhead applied to Job #456?
    Answer: $4,680 When you encounter overhead application problems with multiple departments, you need to identify each department's allocation method and apply it correctly to the specific activity measures for that job. Department A uses machine hours as its allocation base at $12 per machine hour. Job #456 used 150 machine hours in Department A, so the overhead applied is: 150×$12=$1,800150 \times \$12 = \$1,800 Department B applies overhead at 200% of direct labor cost. Job #456 required 80 direct labor hours at $18 per hour in Department B. First, calculate the direct labor cost: 80×$18=$1,44080 \times \$18 = \$1,440. Then apply overhead at 200%: $1,440×200%=$2,880\$1,440 \times 200\% = \$2,880. Note that the 45 machine hours in Department B are irrelevant since Department B doesn't use machine hours for overhead application. Total overhead applied: $1,800+$2,880=$4,680\$1,800 + \$2,880 = \$4,680 Answer A ($4,980) likely includes an error in calculating Department B's direct labor cost or overhead percentage. Answer C ($5,280) probably incorrectly incorporates the 45 machine hours from Department B using Department A's rate, or uses an inflated overhead calculation. Answer D ($4,380) appears to understate one of the department calculations, possibly using incorrect labor hours or rates. The key strategy here is to carefully match each department's allocation base with the correct activity measure from the job. Ignore irrelevant data like machine hours when a department uses a different allocation method. Always double-check that you're applying the right rate to the right base for each department.
  15. A company is developing its predetermined overhead rate based on direct labor hours. Which of the following budgeted costs should be included in the numerator of the POR calculation?
    Answer: Factory maintenance supervisor salary The numerator of the predetermined overhead rate calculation consists of all estimated manufacturing overhead costs. The factory maintenance supervisor's salary is an indirect labor cost incurred in the factory, making it part of manufacturing overhead. Corporate headquarters property taxes and sales department utilities are period costs (administrative and selling costs, respectively), not manufacturing costs. Direct labor fringe benefits are typically treated as part of the direct labor cost, not overhead, though some companies treat them as MOH. However, the factory supervisor salary is unambiguously MOH.
  16. Stellar Corp. uses a predetermined overhead rate of $18.50 per machine hour. The company's budget for the period was based on 10,000 machine hours. During the period, the company actually worked 11,000 machine hours and incurred actual manufacturing overhead costs of $205,000. What is the total manufacturing overhead applied to Work in Process during the period?
    Answer: $203,500 Applied overhead is calculated by multiplying the predetermined overhead rate by the actual amount of the allocation base incurred. The POR is $18.50 per machine hour, and the actual machine hours worked were 11,000. Therefore, Applied Overhead = $18.50 * 11,000 = $203,500. The budgeted machine hours (10,000) are used to calculate the POR, not to apply it. The actual manufacturing overhead cost ($205,000) is used to determine if overhead is over- or under-applied, but it is not the amount of overhead applied to production.
  17. At the end of the fiscal year, Galileo Corp. reported actual manufacturing overhead of $410,000 and actual direct labor hours of 20,000. The company's records show that manufacturing overhead was over-applied by $10,000 for the year. What predetermined overhead rate per direct labor hour was in effect during the year?
    Answer: $21.00 This problem requires working backwards from the over-applied overhead amount. Over-applied overhead means that the overhead applied to Work in Process is greater than the actual overhead incurred. The relationship is: Applied MOH - Actual MOH = Over-applied amount. We can find the Applied MOH: Applied MOH - $410,000 = $10,000, which means Applied MOH = $420,000. The formula for applied overhead is POR Actual Activity. So, $420,000 = POR 20,000 DLH. Solving for the POR: POR = $420,000 / 20,000 DLH = $21.00 per DLH.
  18. Lyra Corp. estimates it will incur $750,000 in manufacturing overhead costs next year. The company's primary cost driver is direct labor cost. The budget includes 25,000 direct labor hours at an average wage rate of $24 per hour. What is Lyra's predetermined overhead rate?
    Answer: 125% of direct labor cost The allocation base is direct labor cost, not direct labor hours. First, calculate the total estimated direct labor cost for the year. Total DL Cost = 25,000 DLH $24/DLH = $600,000. Second, calculate the predetermined overhead rate as a percentage of direct labor cost. POR = (Estimated MOH / Estimated DL Cost) 100% = ($750,000 / $600,000) 100% = 1.25 100% = 125% of direct labor cost.
  19. At the beginning of the year, Dalton Industries estimated manufacturing overhead would be $600,000 and the allocation base would be 40,000 machine hours. At the end of the year, actual manufacturing overhead was $635,000 and actual machine hours were 42,000. What was the status of manufacturing overhead at year-end?
    Answer: $5,000 under-applied This is a three-step problem. Step 1: Calculate the POR. POR = Estimated MOH / Estimated Activity = $600,000 / 40,000 MH = $15.00 per MH. Step 2: Calculate applied overhead. Applied OH = POR Actual Activity = $15.00 42,000 MH = $630,000. Step 3: Compare actual and applied overhead. Actual MOH ($635,000) > Applied MOH ($630,000). The difference is $5,000. Since actual overhead is greater than applied overhead, the overhead is under-applied by $5,000.
  20. Alpine Industries uses machine hours to apply overhead and estimated the following for the year: 50,000 machine hours and $750,000 overhead costs. After 8 months, the company has used 32,000 machine hours and incurred $485,000 in actual overhead. Management wants to revise the predetermined overhead rate for the remaining 4 months based on updated annual estimates of 48,000 total machine hours and $720,000 total overhead. What overhead rate should be used for the remaining 4 months?
    Answer: $15.00 per machine hour for the remaining months When companies need to revise their predetermined overhead rates mid-year due to changing circumstances, they must calculate a new rate that will properly allocate the remaining overhead costs over the remaining activity period. Here's the calculation: With updated annual estimates of 48,000 machine hours and $720,000 overhead, but 32,000 hours already used in 8 months, you have 16,000 machine hours remaining (48,000 - 32,000). The remaining overhead to be allocated is $235,000 ($720,000 - $485,000 actual overhead incurred). Therefore, the revised rate for the remaining 4 months is $235,00016,000 hours=$14.69\frac{\$235,000}{16,000 \text{ hours}} = \$14.69 per machine hour, which rounds to $15.00. Answer A ($15.63) incorrectly divides the remaining overhead by only the machine hours expected in the final 4 months, rather than considering that some of the annual hours were already used. Answer B ($14.71) makes a calculation error, likely by using slightly different rounding or including an incorrect overhead amount. Answer D ($15.00 original rate) represents the initial predetermined rate of $750,00050,000=$15.00\frac{\$750,000}{50,000} = \$15.00, but this ignores the revised estimates entirely. When tackling overhead rate revision problems, always identify three key numbers: remaining overhead to be allocated, remaining activity base units, and the time period for application. The revised rate ensures proper cost allocation based on current information rather than outdated estimates.

Start this quiz