Budgeted Overhead Application Rates Quiz

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