Almaraz Corporation has two manufacturing departments--Forming and Finishing. The company used the following data at the beginning of the year to calculate predetermined overhead rates:

Forming Finishing Total
Estimated total machine-hours (MHs) 7,000 3,000 10,000
Estimated total fixed manufacturing overhead cost $40,600 $8,100 $48,700
Estimated variable manufacturing overhead cost per MH $1.30 $2.80

Assume that the company uses a plantwide predetermined manufacturing overhead rate based on machine-hours. That predetermined manufacturing overhead rate is closest to:

a. $6.62
b. $4.87
c. $4.30
d. $7.80

a. $6.62

Explanation:

Predetermined overhead rate is the rate at which the estimated overhead is applied to any product / project / department. It is calculated by dividing the estimated overhead for the year by estimated number of activities on which it is applied.

In this question overheads are applied on the basis of machine hours.

As per given data

                                                  Forming     Finishing     Total

Estimated total machine-hours  7,000         3,000       10,000

Estimated total fixed overhead $40,600    $8,100      $48,700

Estimated variable overhead    $9,100        $8,400     $17,500

Total Variable overhead            $49,700     $16,500   $66,200

Total variable overhead

Forming = 1.3 x 7000 = $9,100

Finishing = 2.8 x 3000 = $8,400

Predetermined Overhead rate = Total Overhead /  total machine hours

Predetermined Overhead rate = $66,200 /  10,000 = $6.62