Question

In the previous example we computed a predetermined overhead rate of $37.50 per DLH (direct labor hours). Now, at the end of the year, let's say that the plant actually had incurred $38,632,495 of MOH, and had actually used 946,250 of DL hours which cost $21,763,750 in total. Let's also say they had used DL hours, not DL cost, as their allocation base. *Had they overallocated or underallocated MOH to the vehicles that were made during the year? fix this? By how much? How do we

Answer 1

A	Actual Direct labor hours used	946250
B	Predetermined overhead rate	$                    37.50
C=A x B	Applied Manufacturing overheads	$ 3,54,84,375.00
D	Actual Manufacturing overheads spend	$ 3,86,32,495.00
E=D-C	Manufacturing overheads Underapplied	$      31,48,120.00

Actual manufacturing overheads are more than applied manufacturing overheads which means manufacturing overheads are underapplied .

Answer- Manufacturing Overheads Underapplied by $3148120

This can be fixed by Crediting Manufacturing overheads with the amount underapplied and debiting relevant cost head such as Work in process account, finished goods account or Cost of goods sold account.

Given below is an example of how journal entry would look like for Underapplied overheads

Accounts	Debit	Credit
WIP	xxxx
Finished Goods	xxxx
Cost of goods sold	xxxx
Manufacturing overheads		$ 31,48,120.00