Question

The actual manufacturing overhead costs incurred includes: $4,000 (indirect manufacturing labor) + $400 (utilities) + $500 (fire insurance) + $6,000 (indirect materials) + $600 (depreciation on equipment) = $11,500. Because actual manufacturing overhead costs of $11,500 exceed manufacturing overhead costs applied of $11,000, manufacturing overhead is underallocated by $500. What is the correct amount of manufacturing overhead costs applied?

1) $11,000
2) $11,500
3) $500
4) Cannot be determined

Answer 1

The correct amount of manufacturing overhead costs applied is $11,000, which is indicated by the actual costs being $500 higher, making it an underallocated overhead scenario. Spreading the overhead is about allocating fixed costs across the output, resulting in a decreasing average fixed cost curve as production rises.

Step-by-step explanation:

The correct amount of manufacturing overhead costs applied in this scenario is $11,000. This figure is provided in the question itself, which states that the actual manufacturing overhead costs of $11,500 exceed the applied costs by $500, indicating that the applied costs are indeed $11,000. This scenario is an example of underallocated overhead, where the actual costs exceed the estimated costs that were applied to products or services.

Spreading the overhead refers to the allocation of fixed costs (overhead) across the units produced. If the fixed cost is $1,000, the average fixed cost per unit would decrease as output increases due to the fixed cost being divided among more units, which is visually represented by a downward-sloping average fixed cost curve.