Riverview Company's budget for the coming year includes $5,000,000 for manufacturing overhead, 20,000 hours of direct labor, and 200,000 hours of machine time.

If Riverview applies overhead using a predetermined rate based on machine-hours, what amount of overhead will be assigned to a unit of output which requires 0.6 machine hours and 0.25 labor hours to complete?

a. $25.00.
b. $63.00.
c. Some other amount.
d. $15.00.

d. $15.00

Explanation:

Overhead application rate is the rate at which manufacturing overheads are applied to a product / project / department. It  is calculated by dividing the Budgeted overhead by the budgeted level of activity on which the overhead is applied.

Overhead application rate = Budgeted overhead / Budgeted activity

Overhead application rate = Budgeted overhead / Budgeted machine hours

Overhead application rate = $5,000,000 / 200,000 labor hours

Overhead application rate = $25 per labor hour

Assigned Overhead =  Overhead application rate x Number of machine hours consumed = $25 x 0.6 = $15

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