The Thomlin Company forecasts that total overhead for the current year will be $

Question

The Thomlin Company forecasts that total overhead for the current year will be $15,000,000 and that total machine hours will be 200,000 hours. Year to date, the actual overhead is $15,500,000 and the actual machine hours are 220,000 hours. If the Thomlin Company uses a predetermined overhead rate based on machine hours for applying overhead, as of this point in time (year to date) the overhead is over/under applied by? (Points : 4)
       $1,000,000 over
       $1,000,000 under
       $500,000 over
       $500,000 under

Explanation / Answer

If costs are based off of machine hours the company originally estimated that overhead was allocated at $75 per machine hour. $15,000,000/200,000 = $75/machine hour Actually overhead in machine hours was 220,000 which translates to (220,000 x 75) = $16,500,000 in overhead costs. However, they only ended up spending $15,500,000 so the overhead was under applied by roughly $1,000,000 under. This $1,000,000 would be applied as a prepaid expense on the Asset side of the balance sheet.

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