Question

Lorenzo Company uses a job order costing system that charges overhead to jobs on the basis of direct materials cost. At year-end, the Work in Process Inventory account shows the following

Work in Process Inventory Acct. No. 121
Date	Explanation	Debit	Credit	Balance
2017
Dec. 31	Direct materials cost	1,500,000		1,500,000
31	Direct labor cost	300,000		1,800,000
31	Overhead applied	600,000		2,400,000
31	To finished goods		2,350,000	50,000

1. Determine the predetermined overhead rate used (based on direct materials cost).

Short answer

The predetermined overhead rate is 40%

Step-by-step solution

Meaning Work-in-process

Work in progress refers to items that have been partially completed but are still in the manufacturing process. These objects are in-between locales or separate workstations and are primarily undergoing a specific procedure in the manufacturing cycle.

Determining the predetermined overhead rate.

Predetermined overhead rate = Overhead costs/Direct material costs

= $600,000/$1,500,00

= 40%