Spring Street Engine Shop uses a job order cost system to determine the cost of performing engine repair work. Estimated costs and expenses for the coming period are as follows: Engine parts $ 875,000 Shop direct labor 660,000 Shop and repair equipment depreciation 44,500 Shop supervisor salaries 138,000 Shop property taxes 27,500 Shop supplies 10,000 Advertising expense 22,100 Administrative office salaries 73,500 Administrative office depreciation expense 8,600 Total costs and expenses $1,859,200 The average shop direct labor rate is $30 per hour. Determine the predetermined shop overhead rate per direct labor hour.

The predetermined shop overhead rate per direct labor hour is $10

Explanation:

The formula to compute the predetermined shop overhead rate per direct labor hour is shown below:

Predetermined shop overhead rate = (Total shop overhead cost) : (direct labor hours)

where,

Total shop overhead cost = Shop and repair equipment depreciation + Shop supervisor salaries + Shop property taxes + Shop supplies

= $44,500 + $138,000 + $27,500 + $10,000

= $220,000

And, the Direct labor hours = (Shop direct labor) : (average shop direct labor rate)

= 660,000 : $30

= 22,000 hours

Now put these values to the above formula

So, the rate would equal to

= $220,000 : 22,000 hours

= $10