Pajama Corp. uses direct materials (fabric, thread, buttons), and direct labor (cutting, sewing labor) to make each pair of pajamas. However there are also manufacturing overhead costs (cost of facility, manufacturing management, sewing machines, etc.), which must be taken into consideration. Pajama Corp. allocates overhead to pajamas based on direct labor cost. In other words, it uses a single cost pool, and the cost driver is direct labor cost. Required:
What is the cost driver rate?

Question Completion:

Estimated manufacturing overhead costs = $156,000

Estimated direct labor cost = $390,000

Estimated direct materials cost = $350,000

Pajama Corp.

The cost driver rate = $0.40 per DL cost.

Explanation:

a) Data and Calculations:

Estimated manufacturing overhead costs = $156,000

Estimated direct labor cost = $390,000

Estimated direct materials cost = $350,000

Cost driver rate = $0.40 ($156,000/$390,000)

b) To calculate the cost driver rate, Pajamas Corp. divides the total estimated manufacturing overhead costs by the cost driver (direct labor cost).  This implies that the cost driver rate is the total cost of activity pool divided by its cost driver.  This yields the amount of overhead and indirect costs related to a particular activity.