Question

Freeman Company uses a predetermined overhead rate based on direct labour hours to apply manufacturing overhead to jobs. At the beginning of the year, the company estimated manufacturing overhead would be $150,000 and direct labour hours would be 10,000. The actual figures for the year were $186,000 for manufacturing overhead and 12,000 direct labour hours.

The cost records for the year will show which of the following?

A. overapplied overhead of $30,000.
B. underapplied overhead of $30,000.
C. overapplied overhead of $6,000.
D. underapplied overhead of $6,000.

Answer 1

The cost records will show overapplied overhead of $6,000.

Step-by-step explanation:

The predetermined overhead rate is used to allocate manufacturing overhead costs to jobs. This rate is calculated by dividing the estimated overhead costs by the estimated direct labor hours. In this case, the estimated overhead was $150,000 and the estimated direct labor hours were 10,000, so the predetermined overhead rate would be $15 per direct labor hour ($150,000 / 10,000 hours).

To calculate the applied manufacturing overhead for the year, we multiply the actual direct labor hours (12,000) by the predetermined overhead rate ($15), which gives us $180,000. However, the actual manufacturing overhead for the year was $186,000. This means that the company overapplied manufacturing overhead by $6,000 ($186,000 - $180,000).

Therefore, the cost records for the year will show option C: overapplied overhead of $6,000.

Answer 2

Answer: D. underapplied overhead of $6,000.

Step-by-step explanation:

First we find the Pre-determined overhead rate and we can see that the company estimated manufacturing overhead would be $150,000 and direct labour hours would be 10,000.

So the Pre-determined rate is,

= 150,000/10,000

= $15 per direct labour hour.

We then calculate the actual Applied Overhead. The actual direct labour was 12,000 so calculating we have,

= 15 * 12,000

= $180,000

Now we then calculate for the Underapplied or (Overapplied) manufacturing overhead amount.

The formula is,

Underapplied (Overapplied) Manufacturing = Actual Manufacturing Overhead - Applied Manufacturing Overhead

Underapplied (Overapplied) = 186,000 - 180,000

= $6,000

It is a positive number so it is $6,000 underapplied therefore option D is correct.