Question

Nil co. uses a predetermined factory overhead application rate based on direct labor cost. for the year ended december 31, nil’s budgeted factory overhead was $600,000, based on a budgeted volume of 50,000 direct labor hours, at a standard direct labor rate of $6 per hour. actual factory overhead amounted to $620,000, with actual direct labor cost of $325,000. for the year, overapplied factory overhead was

Answer 1

Answer: “over-applied by $30,000”

We know that the Manufacturing Overhead is applied using direct labor cost as the driver. The predetermined application rate using the direct labor cost is calculated:

Rate = Estimated Overhead/Estimated Driver

Rate = $600,000/($6.00 x 50,000)

Rate = $600,000/$300,000

Rate = $2 of overhead is applied for every $1 of direct labor cost

Since the actual direct labor cost is $325,000, therefore:

Manufacturing Overhead = $325,000 x $2

Manufacturing Overhead = $650,000

 

Since actual Manufacturing Overhead is only equal to $620,000, this means that it is “over-applied by $30,000”