Question

The Prospect Company estimates that its overhead costs will amount to $602,000 and the company's manufacturing...

The Prospect Company estimates that its overhead costs will amount to $602,000 and the company's manufacturing employees will work 86,000 direct labor hours during the current year. Overhead costs are allocated based on direct labor hours. If actual overhead costs for the year amounted to $619,000 and actual labor hours amounted to 87,000, then overhead cost would be:

A- underapplied by $10,000.

B- overapplied by $4,000.

C- underapplied by $17,000.

D- overapplied by $10,000.

Business   Accounting   
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Answer #1

Predetermined overhead rate

Predetermined overhead rate = Total estimated overhead cost / Total estimated direct labor hours

= $602,000 / 86,000 direct labor hours

= $7.00 per direct labor hours

Total Applied Overhead Cost

Total Applied Overhead Cost = Actual labor hours x Predetermined overhead rate

= 87,000 hours x $7.00 per hour

= $609,000

Under-applied Overhead Cost

Total Applied Overhead Cost = $609,000

Actual Overhead cost = $619,000

Here, the Applied Overhead cost is less than the actual overhead cost, therefore, the Under-applied Overhead Cost = $619,000 - $609,000

= $10,000 (Under-applied)

Therefore, the overhead cost would be (A). Underapplied by $10,000

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