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.

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

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.