Question

A company allocates overhead at a rate of 150% of direct labor cost. Actual overhead cost for the current period is $1,170,000, and direct labor cost is $545,000. Determine whether there is over- or underapplied overhead using the T-account.

Answer 1

Answer:

Underapplied

Explanation:

To determine, calculate the following;

Actual overhead = $1,170,000

Applied overhead = 150% * Direct labor cost

Applied overhead = 150% * $545,000

Applied overhead = $817,500

Note that the $817,500 overhead cost was not the actual cost reported in the T account, thus it was Underapplied since the actual amount ($1,170,000) of factory overhead incurred was greater than expected.

Answer 2

Answer:

Under applied overhead     $ 352,500

Explanation:

The over or under applied overhead is the difference between applied(absorbed overhead) and actual  overhead.

Applied overhead = OAR × actual labour cost

                                                                                       $

Applied overhead (150%×545,000) =                817,500

Actual overhead                                                1,1170,000

Under applied overhead                                     352,500

This implies that the amount charged to the Production(work in progress ) account  for absorbed overhead is less than the actual overhead by $352,500