Question

The following information relates to Burgundy for July 2020: Actual direct labour costs                            

The following information relates to Burgundy for July 2020:

Actual direct labour costs                                             $50,000

Actual direct labour rate per hour                                 $10

Factory overhead rate per direct labour hour                $15

Factory overhead incurred                                           $80,000

As part of the cost planning and cost control of operations and activities, management is concerned regarding the applied overhead rate used.

  1. Considering the company had budgeted a factory overhead of $90,000 and 6,000 hours of direct labour, identify whether there is a numerator and/or denominator reason leading to an underapplied or overapplied overhead, specifically for Burgundy.
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Answer #1

Predetermined overhead.

Predermined overhead rate = Budgeted factory overhead / Budgeted hrs

Predetermined overhead rate = $15 ($90,000/6,000)

Predetermined overhead rate is $15 per labour hr.

Applied Overhead = Actual labour hrs * Predetrmined rate

Actual labour hrs = 5,000hrs ($50,000/$10)

Applied overhead = $75,000 (5,000*$15)

Actual overhead = $80,000

Under applied Overhead = $5,000 ($80,000-$75,000)

It is under applied because of under predetermined overhead rate .

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