–
Fixed Overhead Rate Determination
The fixed overhead budget is also prepared at the department–accow1t
level of detail. In order to convert the fixed overhead budget into the fixed
overhead portion of Robin Manu facturing ‘s overhead rate, it is necessary
to divide by the denominator level of activity. Actual direct labor hours is
considered to be the best overall mea- sure of Robin’s capacity, in addition
to driving the incurrence of variable overhead. Several possible levels of
activity could be considered as the denominator level of
activity. These would include theoretical capacity (although this is really hard
to
.
–
. .
rationalize) , practical capacity, “normal ” capacity (the average of what might be
expected over the next three to five years), and the budget level of
capacity. Robin Manufac tur ing‘s management chose the latter, which
in this case is
111,500
direct labor hours. Dividing that into the total fixed
overhead
{$326,700/ 111,500)
produces a value of
$2.93
per DLH for the
fixed overhead rate. Therefore, the
total
overhead rate is
$8.73
per DLH.