Question

3. Compute the overapplied or underapplied overhead if the company uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. For the month of March, the company’s estimated manufacturing overhead cost was $300,000 based on an estimated activity level of 100,000 direct labor-hours. Actual overhead amounted to $325,000 with actual direct labor-hours totaling 110,000 for the month.

Answer 1

The over or under overhead cost is the difference between overhead applied and actual overhead incurred

estimated overhead cost is only used to calculate the predetermined overhead rate i.e. 300000/100000= $3

now over/under overhead= applied overhead- actual overhead

= actual overhead-predetermined rate*actual labour hours

(if the difference is positive, it is under application and if negative, it is overapplication)

= 325000-110000*3

=325000-330000

over applied overhead= 5000