During the year just completed,Paul Company used a predetermined overhead rate of $3.50 per direct labour hour,based on an estimate of 22,000 direct labour hours to be worked during the year.Actual overhead cost and activity during the year were:
Actual manufacturing overhead cost incurred$ \quad $ $ \quad $ $ \quad $ $ 90,000
Actual direct labour hours worked$ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ 25,000
What was the under- or overapplied overhead for the year?

Question

During the year just completed,Paul Company used a predetermined overhead rate of $3.50 per direct labour hour,based on an estimate of 22,000 direct labour hours to be worked during the year.Actual overhead cost and activity during the year were: 
Actual manufacturing overhead cost incurred$ \quad $ $ \quad $ $ \quad $ $ 90,000
Actual direct labour hours worked$ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ 25,000
What was the under- or overapplied overhead for the year?

Quizplus · Accepted Answer

The predetermined overhead rate is calculated as follows:

Predetermined overhead rate = Estimated overhead cost / Estimated direct labor hours
Predetermined overhead rate = $77,000 / 22,000 hours
Predetermined overhead rate = $3.50/hour

To calculate the applied overhead, we multiply the predetermined overhead rate by the actual direct labor hours worked:

Applied overhead = Predetermined overhead rate x Actual direct labor hours worked
Applied overhead = $3.50/hour x 25,000 hours
Applied overhead = $87,500

The difference between the actual overhead cost incurred and the applied overhead is the under- or overapplied overhead:

Under- or overapplied overhead = Actual overhead cost incurred - Applied overhead
Under- or overapplied overhead = $90,000 - $87,500
Under- or overapplied overhead = $2,500 under applied.

Therefore, the correct answer is B.

During the Year Just Completed,Paul Company Used a Predetermined Overhead \quad

During the Year Just Completed,Paul Company Used a Predetermined Overhead $\quad$