Harris Fabrics computes its predetermined overhead rate annually on the basis of direct labor-hours. At the beginning of the year, it estimated that 37,000 direct labor-hours would be required for the period’s estimated level of production. The company also estimated $505,000 of fixed manufacturing overhead expenses for the coming period and variable manufacturing overhead of $4.00 per direct labor-hour. Harris's actual manufacturing overhead for the year was $721,824 and its actual total direct labor was 37,500 hours.

Question

Harris Fabrics computes its predetermined overhead rate annually on the basis of direct labor-hours. At the beginning of the year, it estimated that 37,000 direct labor-hours would be required for the period’s estimated level of production. The company also estimated $505,000 of fixed manufacturing overhead expenses for the coming period and variable manufacturing overhead of $4.00 per direct labor-hour. Harris's actual manufacturing overhead for the year was $721,824 and its actual total direct labor was 37,500 hours.

Answer 1

To calculate Harris Fabrics' predetermined overhead rate, we need to determine the fixed manufacturing overhead expenses and the variable manufacturing overhead rate.

Fixed manufacturing overhead expenses:
The given information states that Harris Fabrics estimated $505,000 of fixed manufacturing overhead expenses for the period. These fixed expenses remain constant regardless of the level of production.

Variable manufacturing overhead:
The company estimates a variable manufacturing overhead rate of $4.00 per direct labor-hour. This means that for every direct labor-hour worked, there is an additional $4.00 of variable manufacturing overhead.

Actual manufacturing overhead:
The given information also states that Harris Fabrics' actual manufacturing overhead for the year was $721,824.

Actual total direct labor:
The actual total direct labor for the year was reported as 37,500 hours.

Now, let's calculate the predetermined overhead rate:

1. Determine the total estimated overhead:
Total estimated overhead = Fixed manufacturing overhead expenses + Variable manufacturing overhead
Total estimated overhead = $505,000 + ($4.00 x 37,000 direct labor-hours)

2. Calculate the predetermined overhead rate:
Predetermined overhead rate = Total estimated overhead / Estimated total direct labor-hours
Predetermined overhead rate = (Total estimated overhead) / 37,000

3. Calculate the actual overhead applied:
Actual overhead applied = Predetermined overhead rate x Actual total direct labor-hours
Actual overhead applied = (Predetermined overhead rate) x 37,500

4. Compare the actual overhead applied with the actual manufacturing overhead:
If the actual overhead applied matches the actual manufacturing overhead, it means the estimated overhead rate was accurate. If they differ, there may be over or under-applied overhead.

Using the given information, follow these steps to calculate Harris Fabrics' predetermined overhead rate and check for the accuracy of the estimated overhead rate.