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19 May, 11:27

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.

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  1. 19 May, 12:41
    0
    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
  2. 19 May, 15:06
    0
    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.
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