Toronto Company applies overhead based on direct labor hours

Toronto Company applies overhead based on direct labor hours. At the beginning of 20x2, the company estimateed that manufacturing overhead would be $500,000, and direct labor hours would total 50,000. By 20x2 year-end, actual overhead totaled $510,000, and actual direct labor hours were 45,000. On the basis of this information, the 20x2 over-or-underapplied overahead is:

Solution

Predetermined Overhead application rate = Estimated Manufacturing overhead / Estimated direct labour hours Predetermined Overhead application rate = $500000/50000 direct labour hours = $10 per direct labour hour Overhead applied in 20x2 = Actual direct labour hours * Predetermined overhead application rate Overhead applied in 20x2 = 45000 hours * $10 = $4,50,000 The 20X2 Overhead underapplied = Actual overheads - Applied Overheads = $510000 - $450000 = $60,000