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Budgeted factory overhead at normal capacity is $120,000 and normal capacity is 10,000 direct labour hours. What is the total factory overhead rate?
A$5 per direct labour hour
B$7 per direct labour hour
C$10 per direct labour hour
D$12 per direct labour hour
Answer & Solution
Correct answer: D. $12 per direct labour hour
1. The factory overhead rate divides budgeted overhead at normal capacity by normal capacity in direct labour hours.
2. Each of the 10,000 units consumes one direct labour hour, so normal capacity is 10,000 hours.
3. $120,000 divided by 10,000 hours gives $12 per direct labour hour.
4. That $12 then splits into $5 of variable overhead and $7 of fixed overhead per hour.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 8.4 Factory Overhead Variances_
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