Cost Estimation, Deriving Overhead Rates 

Ipanema Pen Company manufactures office supplies such as paper clips and staples. It runs large batches of any one single product and uses a normal job costing system. Manufacturing overhead is assigned to batches by a predetermined rate on the basis of direct labor-hours. The company incurred manufacturing overhead costs during two recent years (adjusted for price-level changes using current prices and wage rates) as follows:

Required
Using the data from the two recent years, write a report to management that shows the fixed and variable overhead rates used to assign manufacturing overhead to its products. Ipanema Pen expects to operate at a level of 115,000 direct labor-hours in year 6.

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Machine-hours worked Manufacturing overhead costs incurred Indirect labor Employee benefits Supplies Power.. Heat and light Supervision Depreciation. Property taxes and insurance Total manufacturing overhead costs Year 3 Year 4 138,000 108,000 $ 5,520,000 $ 4,320,000 2,070,000 1,380,000 1,104,000 1,620,000 1,080,000 864,000 276,000 276,000 1,432,500 1,312,500 3,965,000 3,965,000 1,502,500 1,502,500 $17,250,000 $14,940,000