Question

A company applies overhead at a rate of 150% of direct labor cost. Actual overhead cost for the current period is $1,150,000, and direct labor cost is $565,000. Determine whether there is over- or underapplied overhead using the T-account below. Factory OverheadActual Overhead 950,000 Overapplied overhead 950,000

Answer 1

Under applied overheads= $302,500

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

This already given in the question as 150% of the direct labour rate

= 150% of direct labour cost

Applied overhead= OAR× actual labour cost

= 150% × $565,000=$847,500

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

$1,150,000 - $847,500 = $302,500

Under applied overheads= $302,500

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