The Correct Answer and Explanation is:
The correct answer is: 93 hours * $5.00 = $465
In cost accounting, manufacturing overhead costs are indirect costs that cannot be easily traced to a specific job. To assign these costs, companies use a predetermined overhead rate. This rate is calculated at the beginning of an accounting period by dividing the total estimated overhead cost by the total estimated allocation base, such as direct labor hours.
The formula to apply overhead to a specific job is:
Applied Overhead = Predetermined Overhead Rate × Actual Amount of the Allocation Base Incurred
In this problem, Lexington Company has already established its predetermined overhead rate at $5.00 per direct labor hour. The question asks for the amount of overhead cost that should be applied to a specific job. To do this, we must use the actual amount of the allocation base consumed by that job, not the estimated amount.
The problem states that the job required 93 hours. This is the actual number of direct labor hours worked. The fact that the job was estimated to require 83 hours is irrelevant for calculating the applied overhead. The estimate may be used for initial job costing or for analyzing variances later, but the accounting entry to apply overhead to the Work in Process inventory uses the actual activity.
Therefore, the correct calculation is to multiply the actual hours worked by the predetermined overhead rate:
93 actual direct labor hours × $5.00 per hour = $465
This equation correctly computes the overhead cost to be assigned to the job. The other options are
