Wonderland Inc. estimates that its manufacturing overhead for 2010 will be $3,600,000. Direct labor costs are estimated to be $2,400,000. Overhead is applied to production based on direct labor costs. Actual direct labor and manufacturing overhead costs for the year were $3,750,000 and $5,800,000, respectively. What is the overapplied or underapplied during 2010?

Question

Quizplus · Accepted Answer

The overhead applied to production is based on the estimated direct labor costs. The predetermined overhead rate is calculated as estimated overhead costs divided by estimated direct labor costs: $3,600,000 / $2,400,000 = 1.5. The actual direct labor costs were $3,750,000, so the applied overhead is 1.5 * $3,750,000 = $5,625,000. The actual overhead was $5,800,000. Therefore, the overhead was underapplied by $5,800,000 - $5,625,000 = $175,000.