Question

XYZ Company applies overhead to jobs using direct labor cost as an activity. For the current year, XYZ's estimated overhead was $144,000 while the actual overhead cost totaled $136,000. For the current year, XYZ's estimated direct labor cost was $240,000 and its actual direct labor cost amounted to $220,000. For the year, overhead was:________

a. over-applied by $6,800
b. over-applied by $4,000
c. over-applied by $8,000
d. under-applied by $6,800
e. under-applied by $4,000
f. under-applied by $8,000

Answer 1

Answer:

e. under-applied by $4,000

Explanation:

The overhead rate was calcualte considering labor cost:

$\frac{Cost\: Of \:Manufacturing \:Overhead}{Cost \:Driver}= Overhead \:Rate$

144,000 / 240,000 = 0.60

Each dollar of labor cost applies 60 cent of overhead

applied overhead:

$220,000 labor cost x 0-60 each = 132,000 applied overhead

now we compare against the 136,000 actual overhead

as we didn't met the value and fell short, we have underapplied the overhead.

Answer 2

Answer:

e. under-applied by $ 4,000

Explanation:

Computation  for over or under application of overhead

Estimated overhead                                          $ 144,000

Estimated Direct labour cost                            $ 240,000

Estimated predetermined overhead              

$ 144,000 / $ 240,000               = $ 0.60 per direct labor cost

Total of applied overhead is Direct labor costs * Overhead rate per Direct labor cost.

$ 220,000 * $ 0.60   = Applied Overhead                $ 132,000

                                      Actual Overhead                  $ 136,000

Under applied overhead                                           $ ( 4,000)