Darrow Company uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. Last year, the company worked 10, 000 direct labor-hours and incurred $80, 000 of actual manufacturing overhead cost. If overhead was underapplied by $2, 000, the predetermined overhead rate for the company for the year must have been:

INTRODUCTION TO COST ACCOUNTING

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

A	$7.80
B	$8.00
C	$8.20
D	$8.40

Explanation:

Detailed explanation-1: -Osborn Manufacturing uses a predetermined overhead rate of $18.70 per direct labor-hour. This predetermined rate was based on a cost formula that estimates $233, 750 of total manufacturing overhead for an estimated activity level of 12, 500 direct labor-hours.

Detailed explanation-2: -Parsons Corporation uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs.

Detailed explanation-3: -Monitoring relative expenses: Predetermined overhead rate provides companies with a percentage they can monitor on a quarterly, monthly and even weekly basis, with the amount of base and expense being proportionate to each other. This can help you ensure costs aren’t escalating.

Detailed explanation-4: -The predetermined overhead rate is set at the beginning of the year and is calculated as the estimated (budgeted) overhead costs for the year divided by the estimated (budgeted) level of activity for the year. This activity base is often direct labor hours, direct labor costs, or machine hours.

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