Question

Blanket Corporation applies manufacturing overhead on the basis of direct labor hours. At the beginning of the most recent year, the company bases its predetermined overhead rate on the total estimated overhead of $450,000 and 75,000 estimated machine hours. Actual manufacturing overhead for the year amounted to $460,000 and actual machine hours were 80,000. Assuming that the entire amount of the underapplied or overapplied overhead is closed out to cost of goods sold, what would be the effect of the underapplied or overapplied overhead on the company's net income for that period?

Answer 1

Total estimated overhead	450000
Divide by estimated direct labor hours	75000
Predetermined overhead rate	6.00
Actual machine hours	80000
X Predetermined overhead rate	6.00
Overhead applied	480000
Overhead applied	480000
Less: Actual manufacturing overhead	460000
Overapplied applied	20000

Overapplied overhead decreases Cost of goods sold and thus increases net income.

Company's net income would increase by $20000