Question

Morris Company applies overhead based on direct labor costs. For the current year, Morris Company estimated total overhead costs to be $480,000, and direct labor costs to be $2,400,000. Actual overhead costs for the year totaled $440,000, and actual direct labor costs totaled $2,000,000. At year-end, the balance in the Factory Overhead account is a:

Answer 1

Answer: $40,000 Underapplied

Explanation:

The overhead rate is calculated as the estimated Overhead Cost divided by the estimated direct labor cost. Therefore,

Overhead rate =$480,000/$2,400,000

= 0.2 = 20%

Actual overhead = $440,000

Applied overhead = $2,000,000 × 20%

= $2,000,000 × 0.2

= $400,000

Factory overhead = Actual Overhead - Applied Overhead

= $440,000 - $400,000

= $40,000 Underapplied