Adams Manufacturing allocates overhead to production on the basis of direct labo

Question

Adams Manufacturing allocates overhead to production on the basis of direct labor costs. At the beginning of the year, Adams estimated total overhead of $396,000; materials of $410,000 and direct labor of $220,000. During the year Adams incurred $418,000 in materials costs, $413,200 in overhead costs and $224,000 in direct labor costs. Compute the amount of under- or overapplied overhead for the year.

A. $10,000 overapplied.

B. $17,200 overapplied.

C. $10,000 underapplied.

D. $17,200 underapplied.

E. $4,800 underapplied.

Explanation / Answer

to know whether the overhead cost is overapplier or under applied we need to first find the difference between

the estimated total overhead cost and the actual overhead cost.

that is = estimated - actual = 396000 - 413200 = -17200

if the difference is a positive number then we have an over applied overhead for the year

and if the difference is a negative then we have an under applied overhead for the year

as we get a negative answer

=> the amount of underapplied overhead for the year is = $ 17200

option (D) is correct

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