Keystone Company applies overhead on the basis of machine hours. Given the following data, compute the amount of overhead under - or over applied for the period.

Estimated annual overhead cost $2,250,000

Actual annual overhead cost $2,227,500

Estimated machine hours 300,000

Actual machine hours 295,000

A) $1,120,000 applied and $25,000 overapplied

B) $1,200,000 applied and $25,000 overapplied

C) $1,120,000 applied and $25,000 underapplied

D) $1,145,000 applied and neither under - nor overapplied

Overhead allocated = $2,212,500

Underapplied = $15,000

Explanation:

Giving the following information:

Estimated annual overhead cost $2,250,000

Actual annual overhead cost $2,227,500

Estimated machine hours 300,000

Actual machine hours 295,000

First, we need to calculate the estimated manufacturing overhead rate we need to use the following formula:

Estimated manufacturing overhead rate = total estimated overhead costs for the period / total amount of allocation base

Estimated manufacturing overhead rate = 2,250,000/300,000 = $7.5 per machine hour

Now, we need to allocate the overhead based on actual machine hours:

Allocated MOH = Estimated manufacturing overhead rate * Actual amount of allocation base

Allocated MOH = 7.5 * 295,000 = $2,212,500

Finally, we calculate the under/over applied overhead:

Over/under allocation = real MOH - allocated MOH = 2,227,500 - 2,212,500 = 15,000 undeallocated