Question

The Prospect Company estimates that its overhead costs will amount to $602,000 and the company's manufacturing employees will work 86,000 direct labor hours during the current year. Overhead costs are allocated based on direct labor hours. If actual overhead costs for the year amounted to $619,000 and actual labor hours amounted to 87,000, then overhead cost would be:___________.

A- underapplied by $10,000.
B- overapplied by $4,000.
C- underapplied by $17,000.
D- overapplied by $10,000.

Answer 1

The correct answer is A.

Step-by-step explanation:

Giving the following information:

Estimated:

Overhead= $602,000

Direct labor hours= 86,000

Actual:

Overhead= $619,000

Direct labor hours= 87,000

First, we need to calculate the estimated overhead rate:

Estimated manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Estimated manufacturing overhead rate= 602,000/86,000= $7 per direct labor hour

Now, we can allocate overhead:

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base

Allocated MOH=7*87,000= $609,000

Finally, we determine the over/under allocation:

Under/over applied overhead= real overhead - allocated overhead

Under/over applied overhead= 619,000 - 609,000

Under/over applied overhead= 10,000 underallocated