A manufacturing company has variable overhead costs of $2.50 per unit and fixed costs of $5,000 per month. Each unit requires 4 hours of direct labor and the company expects to produce 2,000 units each month. The standard overhead rate will be $ per direct labor hour.
Question
A manufacturing company has variable overhead costs of 5,000 per month. Each unit requires 4 hours of direct labor and the company expects to produce 2,000 units each month. The standard overhead rate will be $ per direct labor hour.
Solution
To calculate the standard overhead rate per direct labor hour, we first need to calculate the total overhead costs.
Step 1: Calculate the total variable overhead costs Variable overhead costs per unit = 2.50 * 2,000 = $5,000
Step 2: Calculate the total overhead costs Total overhead costs = Fixed overhead costs + Total variable overhead costs Total overhead costs = 5,000 (variable costs) = $10,000
Step 3: Calculate the total direct labor hours Each unit requires 4 hours of direct labor Total direct labor hours = Direct labor hours per unit * Expected units to be produced each month Total direct labor hours = 4 hours/unit * 2,000 units = 8,000 hours
Step 4: Calculate the standard overhead rate Standard overhead rate = Total overhead costs / Total direct labor hours Standard overhead rate = 1.25 per direct labor hour
So, the standard overhead rate is $1.25 per direct labor hour.
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