Question - Assume that MTM manufacturing estimates it will spend $1 million on overhead expenses. MTM is a highly automated manufacturing plant; therefore, the majority of its overhead expenses relate to machinery (depreciation, repairs and maintenance, electricity used). Machine hours used would be a reasonable way to allocate overhead costs to products because use of machinery causes (or drives) overhead expenses. MTM estimates that it will run its machines for 40,000 hours during the year.
Questions:
1) What is the formula to calculate MTM's predetermined overhead rate:
2) What is the amount of overhead allocated each time a product accumulates one hour of machine time?
3) Calculate the overhead that would be allocated to a product that uses 3.5 hours of machine time.