Paul Company used a predetermined overhead rate during the year just completed of $3.50 per direct labour hour, based on an estimate of 22,000 direct labour hours to be worked during the year. Actual overhead cost and activity during the year were: $$\begin{array} { | l | l | }
\hline \text { Actual manulacturing overhead cost incurred } & \$ 90,000 \
\hline \text { Actual direct labour hours worked } & 25,000 \
\hline
\end{array}$$ The underapplied or overapplied overhead for the year was:
A)$2,500 underapplied.
B)$13,000 underapplied.
C)$2,500 overapplied.
D)$10,500 overapplied.

Question

Paul Company used a predetermined overhead rate during the year just completed of $3.50 per direct labour hour, based on an estimate of 22,000 direct labour hours to be worked during the year. Actual overhead cost and activity during the year were: $$\begin{array} { | l | l | } 
\hline \text { Actual manulacturing overhead cost incurred } & \$ 90,000 \
\hline \text { Actual direct labour hours worked } & 25,000 \
\hline
\end{array}$$ The underapplied or overapplied overhead for the year was:
A)$2,500 underapplied.
B)$13,000 underapplied.
C)$2,500 overapplied.
D)$10,500 overapplied.

Quizplus · Accepted Answer

The predetermined overhead rate is $3.50 per direct labour hour. With 25,000 actual hours worked, the applied overhead is 25,000 x $3.50 = $87,500. The actual overhead cost was $90,000, so the overhead is underapplied by $90,000 - $87,500 = $2,500.

Paul Company Used a Predetermined Overhead Rate During the Year