Harrington Company uses predetermined overhead rates to apply manufacturing overhead to jobs. The predetermined overhead rate is based on machine-hours in the Machining Department and direct labor cost in the Assembly Department. At the beginning of the year, the company made the following estimates: Machining Assembly Direct labor hours 16,000 12,000 Direct labor cost $ 20,000 $ 15,000 Machine-hours 5,000 1,000 Manufacturing overhead $ 25,000 $ 30,000 What predetermined overhead rates would be used in the Machining and Assembly Departments, respectively?

Answer                            

                           Machining Department    Assembly department        

POAR   =        $5 per machine hour         200% of direct labor cost

Explanation:

Under absorption costing, overheads are charged to products using pre-determined overhead absorption rate. With this rate, overhead are included in the cost of every unit produced.

The rated is computed follows:

Predetermined overhead absorption rate (POAR)

= Estimated overhead for the period/Estimated activity level

Machining Department

POAR =25,000/ 5,000 machine hours=$5 per machine hour

Assembly department

PIAR = $30,000/15,000× 100 = 200% of labor cost

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