Problem
Southern Cross Telecommunications Ltd manufactures two different fax machines for the business market. Cost estimates for the two models for the current year are as follows:
| |
Basic System
|
Advanced System
|
|
Direct material
|
$400
|
$800
|
|
Direct labour (20 hours @ $15 per hour)
|
$300
|
$300
|
|
Manufacturing overhead
|
$400
|
$400
|
|
Total
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$1100
|
$1500
|
|
The predetermined overhead rate is $20 per direct labour hour
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Each model of fax machine requires 20 hours of direct labour. The basic system requires 5 hours in Department A and 15 hours in Department B. The advanced system requires 15 hours in Department A and 5 hours in Department B. The budgeted overhead costs in these two production departments are as follows:
|
|
Department A
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Department B
|
|
Variable Cost
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$16 per direct labour hour
|
$4 per direct labour hour
|
|
Fixed Cost
|
200 000
|
200 000
|
The firm's management expects to operate at a level of 20 000 direct labour hours in each production department during the current year.
Task
I. Show how the company's predetermined overhead rate was determined.