Question

#4

Mango Company applies overhead based on direct labor costs. For the current year, Mango Company estimated total overhead costs to be $400,000, and direct labor costs to be $200,000. Actual overhead costs for the year totaled $425,000, and actual direct labor costs totaled $226,000. At year-end, Factory Overhead account is:

a) Overapplied by $26,000.

b) Overapplied by $226,000.

c) Neither overapplied nor underapplied

d) Underapplied by $27,000.

e) Overapplied by $27,000

Answer 1

Option (e) is correct

First we will calculate pre determined overhead rate as per below:

Pre determined overhead rate = Estimated overheads / Estimated direct labor costs

Putting the values in the above formula, we get,

Pre determined overhead rate = $400000 / $200000 = $2

Next, we will calculate applied overhead as per below:

Applied overhead = Pre determined overhead rate * Actual direct labor cost

Applied overhead = $2 * $226000 = $452000

Since, actual overheads are less than applied overheads, so it is the case of over applied overheads.

Over applied overheads = Applied overheads - Actual overheads

Over applied overheads = $452000 - $425000 = $27000

Overheads are over applied by $27000.