Question

Rector Company manufactures a line of lightweight running shoes. CEO Mark Rector estimated that the company would incur $2,500,000 in manufacturing overhead during the coming year. When Rector Company uses direct labor hours as its manufacturing overhead application base, the predetermined overhead rate is $10.00/DLH and when it uses machine hours as its manufacturing overhead application base, the predetermined overhead rate is $6.25/MH. Additionally, he estimated the company would operate at a level requiring 250,000 direct labor hours and 400,000 machine hours. At the end of the year, Rector Company had worked 245,000 direct labor hours, used 410,000 machine hours, and incurred $2,515,000 in manufacturing overhead.

a) If the company used direct labor hours as its manufacturing overhead application base, how much overhead was applied to jobs during the year?

Overhead applied $_____

b) Using direct labor hours as the application base, was manufacturing overhead under- or overapplied for the year? By how much?

Manufacturing overhead____ by $____

c) If the company used machine hours as its manufacturing overhead application base, how much overhead was applied to the jobs during the year?

Overhead applied $___

d) Using machine hours as the application base, was manufacturing overhead under- or overapplied for the year? By how much?

Manufacturing overhead ____ by $____

Answer 1

a)
Overhead applied = Actual direct labor hours worked * Predetermined overhead rate based on direct labor hours = 245000 hours * $10.00	$        2,450,000

b)
Actual manufacturing overhead	$        2,515,000
Overhead applied	$        2,450,000
As the overhead applied is less than the actual overhead, the overhead is underapplied by $65,000 ( i.e. $2,515,000 - $2,450,000 )

Manufacturing overhead

underapplied

by

$65,000

c)
Overhead applied = Actual machine hours used * Predetermined overhead rate based on machine hours = 410000 hours * $6.25	$        2,562,500

d)
Actual manufacturing overhead	$        2,515,000
Overhead applied	$        2,562,500
As the overhead applied is more than the actual overhead, the overhead is overapplied by $47,500 ( i.e. $2,562,500 - $2,515,000 )

Manufacturing overhead

underapplied

by

$47,500