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 amount of under- or overapplied overhead for the year.
A) $17,200 underapplied.
B) $4,800 underapplied.
C) $10,000 underapplied.
D) $10,000 overapplied.
E) $17,200 overapplied.

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 amount of under- or overapplied overhead for the year.
A) $17,200 underapplied.
B) $4,800 underapplied.
C) $10,000 underapplied.
D) $10,000 overapplied.
E) $17,200 overapplied.

Quizplus · Accepted Answer

First, we need to calculate the predetermined overhead rate:
Predetermined Overhead Rate = Estimated Overhead / Estimated Direct Labor Costs
Predetermined Overhead Rate = $396,000 / $220,000
Predetermined Overhead Rate = $1.80 per direct labor dollar

Next, we can calculate the allocated overhead for the year:
Allocated Overhead = Actual Direct Labor Costs * Predetermined Overhead Rate
Allocated Overhead = $224,000 * $1.80
Allocated Overhead = $403,200

Finally, we can calculate the under- or overapplied overhead for the year:
Under- or Overapplied Overhead = Actual Overhead Costs - Allocated Overhead
Under- or Overapplied Overhead = $413,200 - $403,200
Under- or Overapplied Overhead = $10,000 underapplied.

Therefore, the best choice is C.

Adams Manufacturing Allocates Overhead to Production on the Basis of Direct