Freeman Company uses a predetermined overhead rate based on direct labor-hours t

Question

Freeman Company uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. At the beginning of the year, the company estimated manufacturing overhead would be $150,000 and direct labor-hours would be 10,000. The actual figures for the year were $186,000 for manufacturing overhead and 12,000 direct labor-hours. The cost records for the year will show:

A. overapplied overhead of $30,000
B. underapplied overhead of $30,000
C. underapplied overhead of $6,000

D. overapplied overhead of $6,000

Explanation / Answer

c. Underapplied overhead of $6,000. The predetermined overhead rate is based on direct labor hours. To find the rate take the estimated costs and divide by the estimated labor hours: 150,000/10,000 = $15 per direct labor hour. Since the actual number of direct labor hours was 12,000, 15*12,000 = 180,000 were applied, which is less than the actual of 186,000 by 6,000.

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