Adams Manufacturing allocates overhead to production on the basis of direct labor costs. At the beginning of the year, Adams estimated total overhead of $396,000; materials of $410,000 and direct labor of $220,000. During the year Adams incurred $418,000 in materials costs, $413,200 in overhead costs and $224,000 in direct labor costs.
-Compute the overhead application rate.
A) 96.6%.
B) 184%.
C) 186%.
D) 55.6%.
E) 180%.

Question

Adams Manufacturing allocates overhead to production on the basis of direct labor costs. At the beginning of the year, Adams estimated total overhead of $396,000; materials of $410,000 and direct labor of $220,000. During the year Adams incurred $418,000 in materials costs, $413,200 in overhead costs and $224,000 in direct labor costs. 
-Compute the overhead application rate.
A) 96.6%.
B) 184%.
C) 186%.
D) 55.6%.
E) 180%.

Quizplus · Accepted Answer

Overhead application rate = Total overhead cost / Direct labor cost
Total overhead cost = Actual overhead cost + Overhead applied
Actual overhead cost = $413,200
Overhead applied = Total overhead cost - Actual overhead cost
= $396,000 + $418,000 - $413,200
= $400,800

Direct labor cost = $220,000 + $224,000 = $444,000

Overhead application rate = $400,800 / $444,000
= 0.90 or 90%

However, the question asks for the rate as a percentage, so we multiply by 100% to get:

Overhead application rate = 90% x 100% = 180%

Therefore, the correct answer is E, with an overhead application rate of 180%.

Adams Manufacturing Allocates Overhead to Production on the Basis of Direct