Professor George Consults provides services to an architects in a 3-state area.

Question

Professor George Consults provides services to an architects in a 3-state area. Overhead is applied to jobs on the basis of direct labor hours (DLH). PGC’s estimate for the current year is that overhead will total $425,000 and the business will use 6,000 DLH.

Over the course of the year, PGC actually used 5,700 DLH and incurred overhead of $390,000.

Required:

A) Calculate the overhead application rate in use based on their original estimates.

B) Calculate the total amount of overhead applied to consulting jobs during the year.

C) Calculate the amount of over- or under-applied overhead.

D) If PGC wanted to have less over- or under-applied overhead next year than the amount you calculated in c, what strategies might the company attempt?

Explanation / Answer

A)

Budgeted Overhead = 425000

Budgeted direct labor hours (DLH) = 6000

Overhead application rate = 425000/6000 = 70.8333

B)

Total amount of overhead applied to consulting jobs during the year = 5700*70.8333 = 403750

C)

Overhead applied = 403750

Overhead incurred = 390000

Amount of under applied = 403750 - 390000 = 13750

D)

If the company want to have less under applied overhead next year then company need to estimate less overhead cost for the next year.

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