Question

Your Company uses a predetermined overhead rate based on direct labor cost. The POR is 80% of direct labor costs. Use the following information to determine by how much the manufacturing overhead cost for the current year will be over or under applied.                    

	Direct labor-hours:
	Estimated for the year................	24,000
	Actual hours worked..................	19,500
	Direct labor cost:
	Estimated for the year................	$300,000
	Actual cost incurred...................	$210,000
	Manufacturing overhead:
	Estimated for the year................	$240,000
	Actual cost incurred...................	$185,000

The manufacturing overhead cost for the current year will be:

		$17,000 over-applied
		$17,000 under-applied
		$55,000 under-applied.
		$55,000 over-applied

Answer 1

Estimated manufacturing overhead = $240,000

Estimated direct labor cost = $300,000

Predetermined overhead rate = Estimated manufacturing overhead / Estimated direct labor cost

= 240,000/300,000

= 80% of direct labor cost

Applied manufacturing overhead = Actual direct labor cost x Predetermined overhead rate

= 210,000 x 80%

= $168,000

Actual manufacturing overhead = $185,000

Under applied manufacturing overhead = Actual manufacturing overhead- Applied manufacturing overhead

= 185,000-168,000

= $17,000

The manufacturing overhead cost for the current year will be:$17,000 under-applied

Second option is correct.