Sable Company Is Debating the Use of Direct Labor Cost

question 216

Multiple Choice

Sable Company is debating the use of direct labor cost or direct labor hours as the cost allocation base for allocating manufacturing overhead.The following information is available for the most recent year: $$\begin{array} { | l | l | } \hline \text { Estimated direct labor cost } & \$ 500,000 \\\hline \text { Actual direct labor cost } & \$ 450,000 \\\hline \text { Estimated manufacturing overhead costs } & \$ 400,000 \\\hline \text { Actual manufacturing overhead costs } & \$ 350,000 \\\hline \text { Estimated direct labor hours } & 250,000 \\\hline \text { Actual direct labor hours } & 245,000 \\\hline\end{array}$$
- If Sable Company uses direct labor hours as the allocation base,what would the predetermined manufacturing overhead rate be?

• A)$1.60 per direct labor hour
• B)$1.40 per direct labor hour
• C)$1.43 per direct labor hour
• D)$1.63 per direct labor hour

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Definitions:

Stockholders' Equity

The ownership stake of shareholders in a corporation, which is the value left over from the assets after liabilities have been taken out.

Treasury Stock

Shares that were issued and later reacquired by the company, reducing the amount of outstanding stock.

Par Common Stock

The nominal value assigned to share of common stock, as specified in the corporate charter, which represents the minimum price shares can be issued.

Cost Method

An accounting method used to value investments, where the investment is recorded at its acquisition cost without recognizing any changes in market value.