Wert Corporation uses a predetermined overhead rate based on direct labor cost t

Question

Wert Corporation uses a predetermined overhead rate based on direct labor cost to apply manfacturing overhead to jobs. Last year, the company's estimated manufacturing was $1,200,000 and its estimated level of activity was 50,000 direct labor-hours. The company's direct labor wage rate is $12 per hour. Actual manufacturing overhead amounted to $1,240,000, with actual direct labor cost of $650,000. For the year, manufacturing overhead was
A) over-applied by $60,000
B)under-applied by $60,000
C) over-applied by $40,000
D) under-applied by $44,000
(Could you explain how did you come up with the answer?)

Explanation / Answer

Hi,

Please find the answer as follows:

Predetermined Overhead Rate = 1200000/50000 = 24 oer direct labor hour

Applied Overhead = 650000/12*24 = 1300000

Actual Overhead = 1240000

Overapplication = 1300000 - 1240000 = 60000

Option A (over-applied by $60,000) is correct.

Thanks.

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