Over applied by $16,500. Under applied by $16,500. Over applied by $40,000. Loga

Question

Over applied by $16,500.

Under applied by $16,500.

Over applied by $40,000.

Logan products computes its predetermined overhead rate annually on the basis of direct labor hours. At the beginning of the year it estimated that its total manufacturing overhead cost would be $590,000 and the estimated total direct labor hours (allocation base) would be 200,000. Its actual overhead for the year was $400,000 and its actual total direct labor hours was 130,000. Was the manufacturing overhead over or under applied and by how much?  

Explanation / Answer

Estimated manufacturing overhead cost = $590,000

Estimated total direct labor hours (allocation base) = 200,000.

Estimated manufacturing overhead rate = 590,000 / 200,000 = $ 2.95 per direct labor-hour.

Actual manufacturing overhead cost = $400,000

Actual direct labor hours (allocation base) = 130,000.

Actual manufacturing overhead rate = 400,000 / 130,000 = $ 3.08 approximately per direct labor-hour.

Actual manufacturing overhead rate per direct labor-hour is greater than Estimated manufacturing overhead rate. Therefore, Actual manufacturing overhead is over applied.

Overhead will be allocated to production =130,000 * 2.95 = $383,500

Therefore, overhead over = $400,000 - $383,500 = $16500

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