Overapplied or Underapplied Overhead (LO 3-4, 3-5) [The following information applies to the questions displayed below.] The following information pertains to Trenton Glass Works for the year just ended. Budgeted direct-labor cost: 75,000 hours (practical capacity) at $16 per hour Actual direct-labor cost: 80,000 hours at $17.50 per hour Budgeted manufacturing overhead: $997,500 Actual selling and administrative expenses: 437,000 Actual manufacturing overhead: Depreciation Property taxes Indirect labor Supervisory salaries Utilities Insurance Rental of space Indirect material (see data below) Indirect material: Beginning inventory, January 1 Purchases during the year Ending inventory, December 31 Exercise 3-34 Part 2 Overapplied overhead $ $234,000 21,000 81,000 614,000 201,000 59,000 2. Calculate the overapplied or underapplied overhead for the year. (Round your intermediate calculations to 2 decimal plac 31,000 301,000 79,000 49,000 94,000 64,000
The Correct Answer and Explanation is :
To calculate whether the overhead is overapplied or underapplied, we first need to determine the following components:
1. Budgeted Manufacturing Overhead Rate
The budgeted manufacturing overhead rate is based on the budgeted direct-labor cost. We know that the budgeted direct-labor cost is 75,000 hours at $16 per hour, so the total budgeted direct-labor cost is:
[
75,000 \text{ hours} \times 16 \text{ dollars/hour} = 1,200,000 \text{ dollars}
]
The budgeted manufacturing overhead is $997,500.
Now, calculate the budgeted overhead rate:
[
\text{Budgeted overhead rate} = \frac{\text{Budgeted manufacturing overhead}}{\text{Budgeted direct-labor cost}} = \frac{997,500}{1,200,000} = 0.8325 \text{ (or 83.25%)}
]
2. Applied Manufacturing Overhead
Next, we calculate the applied manufacturing overhead based on the actual direct-labor cost. The actual direct-labor cost is 80,000 hours at $17.50 per hour, so the total actual direct-labor cost is:
[
80,000 \text{ hours} \times 17.50 \text{ dollars/hour} = 1,400,000 \text{ dollars}
]
Now, apply the budgeted overhead rate to the actual direct-labor cost:
[
\text{Applied manufacturing overhead} = 0.8325 \times 1,400,000 = 1,166,500 \text{ dollars}
]
3. Determine Overapplied or Underapplied Overhead
Finally, we compare the applied manufacturing overhead to the actual manufacturing overhead. The actual manufacturing overhead includes all expenses incurred during the year, which we can calculate by summing all the costs for depreciation, property taxes, indirect labor, supervisory salaries, utilities, insurance, rental of space, and indirect materials.
The actual manufacturing overhead (from the data provided) is:
[
234,000 + 21,000 + 81,000 + 614,000 + 201,000 + 59,000 + 31,000 + 301,000 + 79,000 + 49,000 + 94,000 + 64,000 = 1,728,000 \text{ dollars}
]
Now, compare the applied overhead to the actual overhead:
[
\text{Overapplied or Underapplied} = \text{Applied manufacturing overhead} – \text{Actual manufacturing overhead} = 1,166,500 – 1,728,000 = -561,500
]
Since the result is negative, the overhead is underapplied by $561,500.
Explanation:
- Overapplied overhead occurs when the applied overhead (based on the budgeted rate) exceeds the actual overhead incurred.
- Underapplied overhead occurs when the applied overhead is less than the actual overhead incurred.
- In this case, the company applied less overhead based on the budgeted rate than it actually spent, which leads to underapplied overhead.
Therefore, the company needs to account for the underapplied overhead, which may require adjustments at the end of the period to reflect the actual overhead costs in financial statements.