Targeting inc, a marketing company, uses direct professional labor hours to appl

Question

Targeting inc, a marketing company, uses direct professional labor hours to apply overhead to client projects. The estimated overhead for the year was 300,000 and estimated direct professional labor hours amounted to 15,000 hours at a cost of 450,000. The total actual overhead at the year end was 292,000: actual direct professional labor hours were 14,500 at an actual cost of 444,000. The resulting overhead was: there was neither over- nor under- applied overhead, 2000 over applied, none of these answers are correct, or 2000 under applied

Explanation / Answer

Applied overhead should be calculated for actual hours. Hence, estimated overhead should be calculated first.

Estimated overhead rate = Total estimated overhead/Estimated labor hours

Estimated overhead rate = $300000/15000

= $20

Applied overhead = 14500 hrs * $20

= $29000

Actual overhead = $292000

Applied overhead is higher than actual overhead. Hence it will be over applied.

Over applied overhead = $292000 - $29000

= $2000

Therfore, over applied overhead is $2000

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