Babcox Manufacturing uses a predetermined manufacturing overhead rate based on d

Question

Babcox Manufacturing uses a predetermined manufacturing overhead rate based on direct labor hours to allocate manufacturing overhead to jobs. Selected data about the company’s operations follows:

By how much was manufacturing overhead overallocated or underallocated for the year?

-Answer is $10,000 underallocated
I'm confused on how to solve this

Actual manufacturing overhead cost    $400,000 Estimated manufacturing overhead cost $420,000 Estimated direct labor cost $180,000 Estimated direct labor hours 70,000 Actual direct labor hours 65,000 Estimated machine hours 80,000 Actual machine hours 84,000

Explanation / Answer

As stated in the question, the manufacturing overhead rate is determined based on the direct hours to allocate the manufacturing overhead.

So, predetermined manufacturing overhead rate = Estimated manufacturing overhead/estimated labour hour

= $420000/70000 hrs i.e. $6

Manufacturing overhead would have been recovered by using this rate. this rate will be applied to every direct labour hour.

So manufacturing overhead recovered will be,

Manufacturing overhead rate * Actual Direct labour hour

= $6 * 65000 =$390000

Actual Manufacturing overhead is $ 400000

So underallocated overhead = Actual manufacturing overhead - Manufacturing overhead recovered

= $400000 - $ 390000 i.e. $ 10000

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