Nguyen Inc. applies overhead to products based on direct labor hours using normal costing. During 2016, total overhead costs were estimated to be $500,000. Actual overhead totaled $540,000 based on 32,000 actual direct labor hours. At the end of the year, overhead was overapplied by $20,000. Based on this information, what was the predetermined overhead rate used during 2016?

overhead rate: 17.5

Explanation:

The difference between applied an actual overhead is calculated as follows:

actual hours x overhead rate - actual cost = over or underapplied overhead

underapplied means actual were higher than applied

while, overapplied means the actual cost were lower.

Based on this information we can set up the foermula as follows:

overhead rate x 32,000 - 540,000 = 20,000

now we solve for the rate:

rate = (20,000 + 540,000) / 32,000 = 17.5