Question

Terrence Industries charges manufacturing overhead to products by using a predetermined application rate, computed on the basis of labor hours. The following data pertain to the current year:

Budgeted manufacturing overhead $1,800,000
Actual manufacturing overhead 1,810,000
Budgeted labor hours 60,000
Actual labor hours 61,500

What is the correct status of manufacturing overhead at year-end?

Answer 1

See below

Step-by-step explanation:

First, we need to get the predetermined rate

Predetermined rate = Cost of manufacturing overhead / Cost driver

= $1,800,000/60,000

= $30

We will now calculate the application.

Actual labor hours × rate

= 61,500 × $30

= $1,845,000

We will now compare actual with overhead cost

= Applied Overhead cost - Actual manufacturing overhead

= $1,845,000 - $1,810,000

= $35,000

The above is an over application of overhead cost because the cost applied exceed the actual cost.