Mahler, Inc., applies manufacturing overhead at the rate of $40 per machine hour

Question

Mahler, Inc., applies manufacturing overhead at the rate of $40 per machine hour. Budgeted machine hours for the current period were anticipated to be 120,000; however, a lengthy strike resulted in actual machine hours being worked of only 90,000. Budgeted and actual manufacturing overhead figures for the year were $4,800,000 and $4,180,000, respectively. On the basis of this information, the company's year-end overhead was:

a)underapplied by $580,000.

b)overapplied by $1,200,000.

c)underapplied by $1,200,000.

d)underapplied by $900,000.

e)overapplied by $580,000.

Explanation / Answer

On the basis of the given information, the company's year-end overhead was: option a)underapplied by $580,000.

Explanation:
Given information, Estimated total overhead costs – $4,800,000
Estimated total Machine hours – 120,000
Predetermined overhead rate – $40 per Machine hour

Actuals:
Actual overhead cost– $4,180,000
Actual Machine hours – 90,000

In this case, the Underapplied overhead will be $580,000 and it is calculated as follows.

Step 1 – Calculate the overhead that was applied by taking the actual Machine hours incurred times the predetermined overhead rate. 90,000 x $40 = $3,600,000

Step 2 – Compare actual manufacturing costs to the applied overhead for the accounting period = $4,180,000 - $3,600,000 = $580,000 Under applied.

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