CSLB Law & Business ExamBusiness FinancesMedium
A contractor has $60,000 in monthly overhead expenses and estimates 3,000 direct labor hours will be worked that month. To accurately allocate overhead to each job using job costing, what overhead rate per labor hour should be applied?
- A$20 per hour
- B$15 per hour
- C$25 per hour
- D$18 per hour
Show answer & explanationAnswer & explanation
Correct answer: A. $20 per hour
Overhead rate = Total Overhead ÷ Estimated Direct Labor Hours = $60,000 ÷ 3,000 hours = $20 per hour. Applying this rate to each job's actual labor hours spreads overhead costs proportionally across jobs.
Why the other options are wrong
- B. Incorrect division; does not equal $60,000/3,000.
- C. Incorrect division; does not equal $60,000/3,000.
- D. Incorrect division; does not equal $60,000/3,000.
Overhead Allocation Rate
A rate used in job costing to spread indirect overhead costs across jobs, typically based on direct labor hours or dollars.
- Formula: Total Overhead ÷ Allocation Base (e.g., labor hours)
- Ensures each job absorbs a fair share of indirect costs
- Essential for accurate job profitability analysis
Memory trick: Spread the overhead like butter over labor hours.