Question

Mango Company applies overhead based on direct labor costs. For the current year, Mango Company estimated total overhead costs to be $300, 000, and direct labor costs to be $150, 000. Actual overhead costs for the year totaled $330, 000, and actual direct labor costs totaled $170, 000. At year-end, Factory Overhead account is: a. Overapplied by $10, 000 b. Overapplied by $170, 000. c. Underapplied by $10, 000.

Answer 1

c) Under applied overheads =$10,000

Step-by-step explanation:

Overheads are charged to units produced by the means of an estimated overhead absorption rate. This rate is computed using budgeted overhead and budgeted activity level.

As a result of this, overhead charged to total units product might be over or under absorbed compared to the actual amount incurred.

Overhead absorption rate

=budgeted Overhead/Budgeted labour cost × 100

= $300,000/150,000 × 100

= 200% of direct labour cost

Applied overhead= OAR× actual labour cost

= 200% × $170,000

=$ 340,000

Under applied overhead = is the difference between actual overhead and absorbed

$330,000 - $340,000 = $10,000

Here it is under applied because the applied is less than the actual overhead cost