Sarah's Overhead Dilemma

Sarah’s Overhead Dilemma

Question 1:

Anytime you reduce your denominator while your numerator stays constant, the decimal form of that fraction becomes a larger number. This is how shaving 5% off of the estimated hours in the base for overhead rate calculation results in a boost in the net income at the end of the year. By reducing the base, the overhead rate per hour increases. For example, if the estimated total overhead costs are $5,000,000 and the estimated total labor hours for the year are 440,000 then the overhead rate would be $ll.36 per hour since $5,000000/440,000 hours equals $11.36 dollars per hour. However, if the est...