The Work-in-Process inventory account of a manufacturing firm shows a balance of $3,980 at the end of an accounting period. The job cost sheets of two uncompleted jobs show charges of $660 and $460 for materials, and charges of $560 and $740 for direct labor. From this information, it appears that the company is using a predetermined overhead rate, as a percentage of direct labor costs, of:

Predetermine overhead rate as a percentage of direct labor cost is 120%

Explanation:

To calculate the predetermined overhead rate, we first need to determine the total overheads under the balance of $3980 for two jobs.

The total cost of both jobs which are uncompleted equals,

Total cost both jobs = (660 + 560)   +   (460 + 740)

Total cost both jobs = 1220 + 1200  = $2420

Thus, the overhead cost involved in both jobs is,

Total Overhead cost = 3980 - 2420    = $1560

This total overhead of $1560 has been absorbed on the basis of a predetermine overhead rate based on the direct labor cost. The total direct labor cost involved under both uncompleted jobs is,

Total direct labor cost both jobs = 560 +740   = $1300

So, the predetermined overhead rate is,

Overhead rate = Total overheads / total direct labor cost

Overhead rate = 1560 / 1300    

Overhead rate = $1.2 per $1 of direct labor cost

Expressed as a percentage of direct labor cost, it is:

% Overhead rate = 1560 / 1300    * 100   =  120% of direct labor cost

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