The management accountant at Morrison, Inc. provided the following estimated costs for producing 2,500 units of a specialty product manufactured by the firm:The company believes that direct labor hours are the most appropriate cost driver for assigning overhead costs to its product.Required:1) Compute the predetermined overhead rate for this company.2) Compute the specialty product's total estimated cost per unit.3) Why do firms assign overhead costs using a predetermined overhead rate instead of assigning actual costs?

Question

What will be an ideal response?

Answer 1

1) Predetermined overhead rate:
Total overhead = $10,000 + $5,000 + $3,000 + $7,000 = $25,000;
Predetermined rate = $25,000 ÷ 2,500 = $10.00 per direct labor hour
2) Cost per unit:



3) Using a predetermined rate allows management to determine the cost of the product in a more timely manner. In addition, it smoothes out or annualizes overhead costs so that unit costs are more stable.