Morris Company applies overhead based on direct labor costs.For the current year,Morris Company estimated total overhead costs to be $400,000,and direct labor costs to be $2,000,000.Actual overhead costs for the year totaled $380,000,and actual direct labor costs totaled $1,800,000.
-At year-end,the balance in the Factory Overhead account is a:
A)$380,000 Debit balance.
B)$360,000 Debit balance.
C)$20,000 Debit balance.
D)$400,000 Credit balance.
E)$20,000 Credit balance.

Question

Quizplus · Accepted Answer

The predetermined overhead rate can be calculated as follows:

Predetermined Overhead Rate = Estimated Total Overhead Costs / Estimated Total Direct Labor Costs

= $400,000 / $2,000,000

= 0.20 per dollar of direct labor costs

Using this rate, we can find the amount of overhead applied to actual direct labor costs:

Overhead Applied = Predetermined Overhead Rate x Actual Direct Labor Costs

= 0.20 x $1,800,000

= $360,000

Therefore, the total overhead applied to production during the year is $360,000.

The difference between the actual overhead costs and the overhead applied is the amount of under- or over-applied overhead:

Under- or Over-Applied Overhead = Actual Overhead Costs - Overhead Applied

= $380,000 - $360,000

= $20,000

Since the actual overhead costs were less than the applied overhead, there is an over-application of overhead. This means that the Factory Overhead account has a credit balance of $20,000 at year-end.

Morris Company Applies Overhead Based on Direct Labor Costs