Question

# A company uses a predetermined overhead rate based on direct labor costs to apply manufacturing overhead...

A company uses a predetermined overhead rate based on direct labor costs to apply manufacturing overhead to jobs. At the beginning of the year the company estimated its total manufacturing overhead cost at \$350,000 and its direct labor costs at \$200,000. The actual overhead cost incurred during the year was \$362,000 and the actual direct labor costs incurred on jobs during the year was \$208,000. The manufacturing overhead for the year would be:
A) \$12,000 underapplied
B) \$12,000 overapplied
C) \$2,000 underapplied
D) \$2,000 overapplied

= Estimated total manufacturing overhead cost/Estimated total allocation base (or labor cost)

= \$ 350,000/200,000 = \$ 1.75

= \$ 208,000 x \$ 1.75 = \$ 364,000

Actual manufacturing overhead occurred = \$ 362,000

Over applied manufacturing overhead = \$ 362,000 - \$ 364,000 = \$ 2,000

Hence option “D) \$ 2,000 over applied” is correct answer.

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