Carlo Company uses a predetermined overhead rate based on direct labour hours to apply manufacturing overhead to jobs.The company estimated manufacturing overhead at $255,000 for the year and direct labour hours at 100,000 hours.Actual manufacturing overhead costs incurred during the year totalled $270,000; actual direct labour hours were 105,000.What was the overapplied or underapplied overhead for the year?
A) $2,250 overapplied.
B) $2,250 underapplied.
C) $15,000 overapplied.
D) $15,000 underapplied.

Question

Quizplus · Accepted Answer

Firstly, we need to calculate the predetermined overhead rate, which is calculated as follows: 
Predetermined overhead rate = Estimated manufacturing overhead / Estimated direct labour hours 
= $255,000 / 100,000 hours 
= $2.55 per direct labour hour

Now, we can use this rate to calculate the amount of overhead that should have been applied to the actual number of direct labour hours worked: 
Overhead applied = Predetermined overhead rate x Actual direct labour hours 
= $2.55 x 105,000 hours 
= $267,750

However, we know that actual manufacturing overhead incurred was $270,000. Therefore, overhead was underapplied, because more actual overhead was incurred than was applied to jobs. 
Underapplied overhead = Actual overhead incurred - Overhead applied 
= $270,000 - $267,750 
= $2,250 underapplied

Carlo Company Uses a Predetermined Overhead Rate Based on Direct