Asked by Bailey Rayoum on May 05, 2024
Verified
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:
A) underapplied overhead of $6,000.
B) overapplied overhead of $6,000.
C) underapplied overhead of $30,000.
D) overapplied overhead of $30,000.
Predetermined Overhead Rate
A calculated rate used in cost accounting to allocate overhead costs to products or services, based on estimated overhead costs and activity levels.
Direct Labour Hours
The total hours worked by employees who are directly involved in the production process of a company.
Underapplied Overhead
Occurs when the allocated manufacturing overhead costs are less than the actual overhead costs incurred.
- Identify whether overhead is underapplied or overapplied and adjust accordingly.
- Review the allocation process of manufacturing overhead to individual jobs.
Verified Answer
Predetermined overhead rate = Estimated manufacturing overhead ÷ Estimated direct labour hours
= $150,000 ÷ 10,000 hours
= $15 per direct labour hour
Then, we can calculate the applied overhead:
Applied overhead = Predetermined overhead rate x Actual direct labour hours
= $15 per hour x 12,000 hours
= $180,000
The difference between the actual manufacturing overhead and the applied manufacturing overhead is:
Actual manufacturing overhead - Applied manufacturing overhead
= $186,000 - $180,000
= $6,000
This means that overhead was underapplied by $6,000, and this amount will need to be closed out to the Cost of Goods Sold account at the end of the year.
Learning Objectives
- Identify whether overhead is underapplied or overapplied and adjust accordingly.
- Review the allocation process of manufacturing overhead to individual jobs.
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