Question

Pitt Accounting pays Amanda Hilton $102,600 per year. Assume that Pitt's accountants are expected to work a total of 6,000 direct labor hours in 2018. Pitt's estimated total indirect costs are $288,000 and the allocation base used is direct labor hours. Read the requirements. Requirement 1. What is Pitt's predetermined overhead allocation rate? Predetermined overhead allocation rate 11 11 Requirement 2. What indirect costs will be allocated to Client 507 if Amanda Hilton, an accountant at Pitt Accounting, works 13 hours to prepare the financial statements? Indirect costs allocated xx

Answer 1

Solution:

Requirement 1:

Predetermined overhead allocation rate is calculated at the beginning of each period to apply overheads to products or jobs and is calculated by dividing estimated overheads or indirect costs to be incurred during the period by an allocation base which is given as estimated direct labor hours in the question. The rate which we get indicates the amount of indirect cost we expect to be incurred per labor hour.

Predetermined Overhead allocation rate = Total estimated Indirect costs / Total estimated Direct labor hours

= 288,000 / 6,000

= $ 48 per direct labor hour

Requirement 2:

Indirect costs allocated to client 507 would be based on the number of hours worked. We know that $ 48 is the allocation rate for overheads per labor hour, so for 13 hours the indirect costs to be allocated will be:

Indirect costs allocated = Hours worked on Job x Predetermined Overhead allocation rate

= 13 hours x $ 48

= $ 624