Question

Armour, Inc., an advertising agency, applies overhead to jobs on the basis of direct professional labor hours. Overhead was estimated to be $216,000, direct professional labor hours were estimated to be 18,000, and direct professional labor cost was projected to be $270,000. During the year, Armour incurred actual overhead costs of $212,000, actual direct professional labor hours of 17,500, and actual direct labor cost of $317,000. By year-end, the firm's overhead was:
a. $2,000 underapplied.
b. $6,000 underapplied.
c. $4,000 underapplied
d. $2,000 overapplied
e. $4,000 overapplied.

Answer 1

Answer:

a. $2,000 underapplied.

Explanation:

Estimated Overhead = $216,000

Estimated Professional hours = 18,000

Predetermined overhead rate = $216,000 / 18,000 = $12 per hour

Actual Professional hours = 17,500

Overhead applied = $12 x 17,500 hours = $210,000

Actual overhead = $212,000

Under applied overhead = Applied overhead - Actual overhead

Under applied overhead = $210,000 - $212,000

Under applied overhead = $2,000