Question

During the current year, Elk Company incurred the following direct labor costs: January $40,000 and February $60,000. Elk uses a predetermined overhead rate of 120% of direct labor cost. Estimated overhead for the 2 months, respectively, totaled $39,000 and $71,400. Actual overhead for the 2 months, respectively, totaled $50,000 and $67,000. Was overhead under- or overapplied during January and by how much?

Answer 1

January Overheads are under-applied by $2,000.

Step-by-step explanation:

When,

Actual overheads > Applied overheads we say overheads are under-applied.

Actual overheads < Applied overheads we say overheads are over-applied.

Where,

Applied overheads = Predetermined overhead rate × Actual Activity

Therefore,

Applied overheads (January) = 120% × $40,000

= $48,000

Actual overheads (January) = $50,000.

Conclusion

It can be seen that from the above : Actual overheads : $50,000 > Applied overhead : $48,000, therefore overheads were under-applied.

Amount of under-applied overheads = $50,000 - $48,000

= $2,000