Simple Tools charges manufacturing overhead to products by using a predetermined

Question

Simple Tools charges manufacturing overhead to products by using a predetermined application rate, computed on the basis of labor hours. The following data pertain to the current year:

            Budgeted manufacturing overhead: $1,125,000

            Actual manufacturing overhead: $945,000

            Budgeted labor hours: 45,000

            Actual labor hours: 33,500

            Which of the following choices denotes the correct status of manufacturing overhead at year-end?

            A.   Underapplied by $157,500.

            B.   Overapplied by $107,500.

            C.   Underapplied by $107,500.

            D.   Overapplied by $157,500.

            E.   Overapplied by $241,500.

Explanation / Answer

Predetermine overhead rate = Budgeted manufacturing overhead/Budgeted labour hours

= 1125000/45000

Predetermine overhead rate = 25 per labour hour

Applied overhead = (33500*25) = 837500

Under applied overhead = Applied overhead-actual overhead

= 837500-945000

Under applied overhead = 107500

so answer is c) underapplied by $107500

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