Question

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

Answer 1

Predetermined overhead rate

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

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

Applied manufacturing overhead = Actual hour worked x Predetermined overhead rate

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

Actual manufacturing overhead occurred = $ 362,000

As applied overhead is more than actual overhead, manufacturing overhead is over applied.

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

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