Question

Bramble Music Company makes custom marimbas and xylophones. Since much of the work on these musical instruments is done by hand, the company uses direct labor hours as its manufacturing overhead application base. The company’s annual budgeted overhead costs for 72,100 direct labor hours totaled $576,800.

(a)	Assume that during the year, the company incurred manufacturing overhead totaling $578,000 for 72,100 direct labor hours. By how much was manufacturing overhead under- or overapplied for the year? (Enter negative amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
	UnderappliedOverappliedNeither underapplied nor overapplied Overhead $

(b)	Assume that during the year, the company incurred manufacturing overhead totaling $578,000 for 75,750 direct labor hours. By how much was manufacturing overhead under- or overapplied for the year? (Enter negative amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
	OverappliedNeither underapplied nor overappliedUnderapplied Overhead $

(c)	Assume that during the year, the company incurred manufacturing overhead totaling $604,000 for 75,750 direct labor hours. By how much was manufacturing overhead under- or overapplied for the year? (Enter negative amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
	OverappliedNeither underapplied nor overappliedUnderapplied Overhead $

Answer 1

a) Overapplied by -$1200 ($578000-$576800)

b) Underapplied by $28000 (75750*8-578000)

c) Underapplied by $2000 (75750*8 - 604000)

Workings

1) To calculate Under or Over applied Overheads we first need to calculate the predetermined overhead (OH) rate

Predetermined OH Rate = Total Estimated Manufacturing Overheads/No.of Direct labor/machine hours

IN the given case,

Predetermined OH Rate = 576800/72100 = $8 per direct labor hour

2) Calculate Applied Overheads - The above rate needs to be applied to actual direct labor/machine hours to determine overheads applied

3) Compare the actual overheads with numbers calculated as per 2

3) If Estimated < Actuals overheads are Underapplied and vice versa

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