Definition
Rate Per Direct Labour Hour is a rate used in absorption costing methodologies to allocate manufacturing overhead costs to production outputs or cost units. The rate is typically calculated by dividing the total manufacturing overhead costs by the total direct labor hours. This rate ensures that overhead costs are appropriately distributed across all units produced based on the amount of labor effort attributed to each unit.
Formula
The formula for calculating the Rate Per Direct Labour Hour is:
\[ \text{Rate Per Direct Labour Hour} = \frac{\text{Total Manufacturing Overhead Costs}}{\text{Total Direct Labor Hours}} \]
This computation provides a per-hour overhead cost that can be used to assign manufacturing overhead to individual products or cost units.
Examples
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Example 1:
- Total Manufacturing Overhead Costs: $100,000
- Total Direct Labor Hours: 10,000 hours
Using the formula: \[ \text{Rate Per Direct Labour Hour} = \frac{100,000}{10,000} = $10 \text{ per hour} \]
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Example 2:
- Total Manufacturing Overhead Costs: $250,000
- Total Direct Labor Hours: 50,000 hours
Using the formula: \[ \text{Rate Per Direct Labour Hour} = \frac{250,000}{50,000} = $5 \text{ per hour} \]
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Example 3:
- Total Manufacturing Overhead Costs: $75,000
- Total Direct Labor Hours: 7,500 hours
Using the formula: \[ \text{Rate Per Direct Labour Hour} = \frac{75,000}{7,500} = $10 \text{ per hour} \]
Frequently Asked Questions (FAQs)
Q1: Why is Rate Per Direct Labour Hour important in absorption costing?
- A1: It ensures the accurate distribution of manufacturing overhead costs to individual units of production, reflecting the actual labor effort required.
Q2: How does Rate Per Direct Labour Hour differ from Rate Per Machine Hour?
- A2: Rate Per Direct Labour Hour allocates overhead based on direct labor hours, whereas Rate Per Machine Hour uses machine operation hours for allocation.
Q3: Can the Rate Per Direct Labour Hour change during the year?
- A3: Yes, it can change if there are significant fluctuations in either total overhead costs or direct labor hours.
Q4: How is Rate Per Direct Labour Hour used in job costing?
- A4: In job costing, this rate helps assign overhead costs to specific jobs based on the direct labor hours consumed by each job.
Q5: Is Rate Per Direct Labour Hour applicable in service industries?
- A5: While more common in manufacturing, it can be adapted for service industries to allocate overhead costs based on labor hours.
Related Terms
- Absorption Costing: A costing method that includes all manufacturing costs—direct materials, direct labor, and overhead—in the cost of a product.
- Manufacturing Overhead: Indirect factory-related costs that are incurred when manufacturing a product.
- Cost Unit: A unit of production or service in relation to which costs are ascertained.
- Cost Allocation: The process of identifying, aggregating, and assigning costs to cost objects.
- Direct Labor: Labor costs that can be directly attributed to the production of specific goods or services.
- Activity-Based Costing: A costing method that assigns overhead and indirect costs to related products and services based on activities.
Online Resources
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan - This book provides comprehensive insights into various costing methods, including absorption costing.
- “Managerial Accounting” by Ray H. Garrison, Eric W. Noreen, and Peter C. Brewer - This book is a valuable resource for understanding cost allocation and overhead rates in managerial accounting.
- “Principles of Accounting” by Belverd E. Needles, Marian Powers, and Susan Crosson - This text offers a solid foundation in the principles and practices of accounting, including overhead allocation strategies.
Accounting Basics: “Rate Per Direct Labour Hour” Fundamentals Quiz
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