The standard overhead rate per direct labor hour is determined by dividing total overhead by total hours. If variable overhead is $2.50 per unit and fixed costs are $5,000 per month, with 2,000 units and 4 hours per unit, the rate is:

The standard overhead rate per direct labor hour is determined by dividing total overhead by total hours. If variable overhead is $2.50 per unit and fixed costs are $5,000 per month, with 2,000 units and 4 hours per unit, the rate is:

• A. $0.79
• B. $1.25
• C. $2.50
• D. $5.00

Answer: (B)

The rate per direct labor hour combines both fixed and variable overhead and is found by dividing total overhead by total direct labor hours. First, compute the total hours: 2,000 units × 4 hours per unit = 8,000 hours. Next, determine total overhead: variable overhead is 2.50 per unit × 2,000 units = 5,000; fixed costs are 5,000 per month. Total overhead = 5,000 + 5,000 = 10,000. Now divide total overhead by total hours: 10,000 ÷ 8,000 = 1.25. So the standard overhead rate is $1.25 per direct labor hour. This rate reflects both the variable and fixed components spread over the actual hours worked. The other options correspond to only one component (or to the per-unit variable amount) rather than the combined rate per hour.

The rate per direct labor hour combines both fixed and variable overhead and is found by dividing total overhead by total direct labor hours.

First, compute the total hours: 2,000 units × 4 hours per unit = 8,000 hours.

Next, determine total overhead: variable overhead is 2.50 per unit × 2,000 units = 5,000; fixed costs are 5,000 per month. Total overhead = 5,000 + 5,000 = 10,000.

Now divide total overhead by total hours: 10,000 ÷ 8,000 = 1.25.

So the standard overhead rate is $1.25 per direct labor hour. This rate reflects both the variable and fixed components spread over the actual hours worked. The other options correspond to only one component (or to the per-unit variable amount) rather than the combined rate per hour.