Witten Company uses a traditional cost accounting system and applies overhead on

Question

Witten Company uses a traditional cost accounting system and applies overhead on the basis of machine hours. Given the following data, compute overhead applied and the under- or over-application of overhead for the period:

Estimated annual overhead cost $1,200,000

Actual annual overhead cost $1,150,000

Estimated machine hours 300,000

Actual machine hours 280,000

a. $1,120,000 applied and $30,000 under-applied

b. $1,200,000 applied and $30,000 over-applied

c. $1,120,000 applied and $30,000 over-applied

d. $1,150,000 applied and neither under- nor over-applied

Explanation / Answer

Answer:

1)

Predetermined overhead rate = Estimated annual overhead / Estimated machine hours

= 1,200,000 / 300,000 = $4 per machine hour

Overheads applied = Predetermined overhead rate * Actual Machine hours

= 4 * 280,000 = $1,120,000

2) Overheads under-applied = Actual Overheads - Overheads applied

= 1,150,000 - 1,120,000 = $30,000

Answer: a) $1,120,000 applied and $30,000 under-applied

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