Avery Co. uses a predetermined overhead rate based on direct labor-hours to appl

Question

Avery Co. uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead to jobs. For the month of October, Avery's estimated manufacturing overhead cost was $300,000 based on an estimated activity level of 100,000 direct labor-hours. Actual overhead amounted to $325,000 with actual direct labor-hours totaling 110,000 for the month. How much was the overapplied or underapplied overhead?

$25,000 overapplied

$25,000 underapplied

$5,000 overapplied

$5,000 underapplied

$25,000 overapplied

$25,000 underapplied

$5,000 overapplied

$5,000 underapplied

Explanation / Answer

predetermined overhead rate=estimated manufacturing overhead cost/estimated activity level

=$300,000/100,000 labor hours

=$3/direct labor hour

Hence overhead applied =$3/direct labor hour*110,000 hours

=$330,000

Hence since overhead applied is greater than the actual overhead;

overhead overapplied=(330000-325000)=$5000.

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