Question

Bonita Industries applies overhead on the basis of machine hours. Given the following data, compute overhead applied and the under- or overapplication of overhead for the period:

Estimated annual overhead cost	$1700000
Actual annual overhead cost	$1675000
Estimated machine hours	500000
Actual machine hours	490000

$1666000 applied and $9000 underapplied

$1675000 applied and neither under-nor overapplied

$1666000 applied and $9000 overapplied

$1700000 applied and $9000 overapplied

Answer 1

Option (a) is correct

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

Pre determined overhead rate = Estimated overheads / Estimated machine hours

Putting the given values in the above formula, we get,

Pre determined overhead rate = $1700000 / 500000 = $3.4 per hour

Now, we will calculate overheads applied as per below:

Overheads applied = Pre determined overhead rate * Actual machine hours

Overheads applied = $3.4 * 490000 = $1666000

Actual overheads (given) = $1675000

Since actual overheads are more than applied overheads, so it is under appliedoverheads.

Now, we will calculate the amount for under applied overheads as per below:

Under applied overheads = Actual overheads - Applied overheads

Under applied overheads = $1675000 - $1666000 = $9000