FixAuto is a car repair shop. The company uses direct labour cost as a basis for

Question

FixAuto is a car repair shop. The company uses direct labour cost as a basis for applying manufacturing
overhead costs to jobs. The company estimates its annual overhead to be $140,000 and it expects
employees to work 20,000 hours at an average wage rate of $12 per hour. During the year, employees
actually worked 18,000 hours (at a wage rate of $12.25 per hour) and the actual amount spent on
overhead was $150,000.
Required:
a.) Compute the predetermined overhead rate.
b.) How much overhead would be applied to jobs during the year?
c.) By how much was overhead overapplied or underapplied for the year?

Explanation / Answer

a) Predetermine overhead rate = 140000*100/2400000 = 58.33%

b) Overhead applied = (18000*12.25)*58.33% = $128625

c) Under applied overhead = 128625-150000 = $21375

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