Small Budget Production Company uses a predetermined overhead rate based upon di

Question

Small Budget Production Company uses a predetermined overhead rate based upon direct labour hours. The firm had the following budgeted and actual data for the current year:

Budgeted factory overhead cost
Actual factory overhead cost
Budgeted direct labour hours
Actual direct labour hours

$5000
$6000
1000
1000

What was the amount of under- or over-applied overhead for the year?

Select one:

1. $500 overapplied

2. $500 underapplied

3. $1000 underapplied

4. $1000 overapplied

5. None of the above

Budgeted factory overhead cost
Actual factory overhead cost
Budgeted direct labour hours
Actual direct labour hours

$5000
$6000
1000
1000

Explanation / Answer

Answer is 3rd one i.e. $1000 underapplied

Budgeted Overhead Rate = Budgeted Amount / Budgeted Activity

= 5000 / 1000

= 50

Overhead Applied = Actual Activity x Budgeted Rate

= 1000 x 50 = 5000

(Over) Under Application = Actual Overhead - Overhead Applied

= 6000 - 5000

= 1000

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