Spencerville Incorporated applies manufacturing overhead at the rate of $60 per machine hour. Budgeted machine hours for the current period were anticipated to be 80,000; However, a lengthy strike resulted in actual machine hours being worked of only 65,000. Budgeted and actual manufacturing overhead figures for the year were $4,800,000 and $4,180,000, respectively. On the basis of this information, the company's year-end overhead was:

Question

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The company applies overhead at a rate of $60 per machine hour. The budgeted machine hours are 80,000, which means budgeted overhead for the year would be:

$60 per machine hour x 80,000 machine hours = $4,800,000

However, the actual machine hours worked were only 65,000. Therefore, the amount of overhead that should have been applied is:

$60 per machine hour x 65,000 machine hours = $3,900,000

The actual overhead incurred for the year was given as $4,180,000. This means that overhead was underapplied:

Actual overhead incurred - Overhead that should have been applied
$4,180,000 - $3,900,000 = $280,000

Therefore, the answer is B) underapplied by $280,000.

Spencerville Incorporated Applies Manufacturing Overhead at the Rate of $60