Budgeted Overhead Application Rates Quiz

What are budgeted overhead application rates?

How is total budgeted factory overhead calculated?

What cost-allocation bases does Enriquez Machine Parts Company select for applying overhead?

How is total overhead applied to a particular product calculated?

If Enriquez used 70,000 machine hours in machining, how much overhead was applied?

If Enriquez incurred $190,000 in direct labor cost, how much overhead was applied to assembly?

Budgeted Overhead Application Rates

Budgeted overhead rates are estimates used to apply overhead based on actual events.
The budgeted overhead application rate is calculated by dividing total budgeted factory overhead by the total budgeted amount of the cost driver.

Illustration of Overhead Application

Enriquez Machine Parts Company uses a single cost-allocation base in each department for applying overhead:
- Machine hours in machining
- Direct-labor hours in assembly
Total overhead applied to a product equals budgeted overhead rates multiplied by actual machine hours (MH) or labor cost (LC) used by that product.
Example: A product that uses 6 MH in machining and incurs direct-labor cost of $40 in assembly would have $44 of overhead applied:
- Machining: 6 MH x $4 per MH = $24
- Assembly: $40 of DL cost x 50% = $20
- Total overhead = $24 + $20 = $44

Application of Overhead

If Enriquez had used 70,000 machine hours in Machining, the total overhead applied to Machining would be:
- 70,000 MH x $4 per MH = $280,000
If Enriquez had incurred $190,000 in direct labor cost, the total overhead applied to Assembly would be:
- $190,000 of DL cost x 50% = $95,000

Test your knowledge on budgeted overhead application rates and their importance in estimating and applying overhead costs in manufacturing. This quiz covers the concept of budgeted overhead application rates and their usage in allocating overhead expenses.