Morris Company applies overhead based on direct labor costs. For the current year, Morris Company estimated total overhead costs to be $400,000, and direct labor costs to be $2,000,000. Actual overhead costs for the year totaled $380,000, and actual direct labor costs totaled $1,800,000.
-At year-end, the balance in the Factory Overhead account is a:

Question

Morris Company applies overhead based on direct labor costs. For the current year, Morris Company estimated total overhead costs to be $400,000, and direct labor costs to be $2,000,000. Actual overhead costs for the year totaled $380,000, and actual direct labor costs totaled $1,800,000. 
-At year-end, the balance in the Factory Overhead account is a:

Quizplus · Accepted Answer

The predetermined overhead rate is calculated by dividing the estimated overhead costs by the estimated direct labor costs:

$400,000 ÷ $2,000,000 = 0.20 (or 20%)

This means that for every dollar of direct labor costs, Morris Company estimated to incur 20 cents in overhead costs.

To apply overhead to actual production, Morris Company would multiply the actual direct labor costs by the predetermined overhead rate:

$1,800,000 × 0.20 = $360,000

This is the amount of overhead that should have been applied to production. However, the actual overhead costs incurred were $380,000, which means that there was an overapplication of overhead:

$380,000 - $360,000 = $20,000

This overapplication of overhead would decrease the balance in the Factory Overhead account, resulting in a debit balance. Therefore, the correct answer is C.

Morris Company Applies Overhead Based on Direct Labor Costs