Nguyen Inc. applies overhead to products based on direct labor hours using normal costing. During 2016, total overhead costs were estimated to be $500,000. Actual overhead totaled $540,000 based on 32,000 actual direct labor hours. At the end of the year, overhead was overapplied by $20,000. Based on this information, what was the predetermined overhead rate used during 2016?
$16.88 per direct labor hour.
$16.25 per direct labor hour.
$15.63 per direct labor hour.
$17.50 per direct labor hour.
None of the answer choices is correct.
Estimated overheads = $500,000
predetermined overhead rate = ?
Actual overhead = $540,000
Overapplied overhead = $20,000
Overhead applied = ?
Overapplied overhead = Overhead applied - Actual overhead
20,000 = Overhead applied - 540,000
Overhead applied = $560,000
Overhead applied = Actual direct labor hour x predetermined overhead rate
560,000 = 32,000 x predetermined overhead rate
predetermined overhead rate = $17.50 per direct labor hour
Fourth option is correct
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