Hardwood company uses a job order costings system. Overhead costs are applied to

Question

Hardwood company uses a job order costings system. Overhead costs are applied to jobs on the basis of machine hours. At the beggining of the year management estimated that the company would work 80,000 machine hours and incur $192,000 in manufacturing overhead costs for the year.

1. Compute the company's predetermined overhead rate.
2. Assume that during the year the company actually worked only 75,000 machine hours and incurred $184,000 of manufacturing overhead costs. Compute the amount of underapplied and overapplied overhead for the year.
3. Explain why the manufacturing overhead was underapplied or overapplied for the year.

Explanation / Answer

Overhead rate would be $192,000/ 80,000= $2.40 per machine hour. At 75,000 hours there would be 75,000 *$2.40= $180,000 of applied overhead. If there was $184,000 actually incurred there would be $4,000 of underapplied overhead. Overhead was underapplied because machine hours worked were not as many as were forecast.

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