Rivera Company applies manufacturing overhead to jobs on the basis of direct lab

Question

Rivera Company applies manufacturing overhead to jobs on the basis of direct labor cost. Overhead costs are expected (budgeted) to total $240,000 for the year, and direct labor cost is estimated at $240,000. For the year, $185,000 of overhead costs are incurred and the actual direct labor cost was $210,000.

Compare the amount of overhead that was applied during the year with the actual incurred overhead costs. What is the amount of under - or overapplied overhead at December 31? (please identify both the amount and that it was “under-applied” or “over-applied”)

Explanation / Answer

Expected overhead cost = $240,000
Expected direct labor cost = $240,000

Predetermined Overhead Rate = Expected overhead cost / Expected direct labor cost
Predetermined Overhead Rate = $240,000 / $240,000
Predetermined Overhead Rate = 100% of direct-labor cost

Actual Direct labor cost = $210,000
Predetermined Overhead Rate = 100% of direct-labor cost

Overhead applied = Predetermined Overhead Rate * Actual Direct labor cost
Overhead applied = $210,000 * 100%
Overhead applied = $210,000

Actual Overhead cost = $185,000
Overhead applied = $210,000

Over-applied Overhead cost = Overhead applied - Actual Overhead cost
Over-applied Overhead cost = $210.000 - $185,000
Over-applied Overhead cost = $25,000

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