Question

Barnes Company applies overhead on the basis of machine hours. Given the following data, compute overhead applied and the under- or overapplication of overhead for the period:

a) Estimated annual overhead cost $3,000,000
b) Actual annual overhead cost $2,970,000
c) Estimated machine hours 300,000
d) Actual machine hours 295,000

Answer 1

The overhead applied for the period is calculated at $2,950,000 by using the predetermined overhead rate of $10 per machine hour and the actual machine hours of 295,000. The overhead for the period is underapplied by $20,000, since the actual annual overhead cost of $2,970,000 was more than the overhead applied. Correct option is b)

Step-by-step explanation:

Calculating Overhead Applied and Over/Underapplication

To calculate the overhead applied using machine hours, we need to know the predetermined overhead rate (POR). This is calculated by dividing the estimated annual overhead costs by the estimated machine hours. In this case, the formula is:

POR = Estimated annual overhead cost / Estimated machine hours

POR = $3,000,000 / 300,000 hours = $10 per machine hour

Now, you can calculate the overhead applied (OH Applied) with the actual machine hours used:

OH Applied = POR * Actual machine hours

OH Applied = $10 per machine hour * 295,000 hours = $2,950,000

Finally, to find out the under- or overapplication of overhead, we compare the actual overhead cost to the overhead applied:

Under- or Overapplication = Actual annual overhead cost - OH Applied

Under- or Overapplication = $2,970,000 - $2,950,000 = $20,000 underapplied

This means that the actual overhead cost was $20,000 more than what was applied. Therefore, the overhead for the period is underapplied.