Bard Manufacturing uses a job order cost accounting system. During one month Bard purchased $198,000 of raw materials on credit; issued materials to production of $195,000 of which $30,000 were indirect. Bard incurred a factory payroll of $150,000, paid in cash, of which $40,000 is classified as indirect labor. Bard uses a predetermined overhead application rate of 150% of direct labor cost. If Bard incurred total overhead costs of $167,800 during the month, compute the amount of under- or overapplied overhead:

Question

Quizplus · Accepted Answer

The calculation for the predetermined overhead application rate is:

Predetermined overhead application rate = (150% x Direct labor cost) = (150% x $110,000) = $165,000

The amount of overhead applied to production is then:

Overhead applied to production = Predetermined overhead application rate x Direct labor cost
= $165,000 x $110,000 = $18,150,000

The amount of overhead incurred is $167,800, which is less than the amount of overhead applied to production. Therefore, there is an underapplied overhead of:

Underapplied overhead = Overhead applied to production – Overhead incurred
= $18,150,000 – $167,800 = $2,800

The answer is choice C, $2,800 underapplied.

Bard Manufacturing Uses a Job Order Cost Accounting System