Mayo Resources supplies the following information. Manufacturing overhead is applied on the basis of direct labour hours.
Estimated manufacturing overhead costs $3 000 000
Estimated direct labour hours 250 000
Actual direct labour hours 240 000
Actual manufacturing overhead costs $3 050 000
Compute the amount of overapplied or underapplied overhead.

Question

Quizplus · Accepted Answer

The predetermined overhead rate is calculated as follows:

Predetermined overhead rate = Estimated manufacturing overhead cost / Estimated direct labour hours

Predetermined overhead rate = $3,000,000 / 250,000

Predetermined overhead rate = $12 per direct labour hour

The amount of overhead applied to actual production is calculated as follows:

Overhead applied = Actual direct labour hours x Predetermined overhead rate

Overhead applied = 240,000 x $12

Overhead applied = $2,880,000

The difference between the actual overhead cost incurred and the overhead applied is the amount of overapplied or underapplied overhead.

Overapplied/Underapplied = Actual manufacturing overhead cost - Overhead applied

Overapplied/Underapplied = $3,050,000 - $2,880,000

Overapplied/Underapplied = $170,000

Since the actual overhead cost is greater than the overhead applied, overhead is underapplied by $170,000. Therefore, the correct answer is C) $70,000 underapplied.

Mayo Resources Supplies the Following Information