JD Corporation uses a joborder cost system and applies manuf

JD Corporation uses a job-order cost system and applies manufacturing overhead to jobs using a predetermined overhead rate based on direct labor dollars. The rate for the current year is 200 percent of direct labor dollars. This rate was calculated last November and will be used throughout the current year. During September, direct labor added co jobs was as follows:

Job #1

Job #2

Job#3

Direct labor

$1,000

$4,500

$2,000

Actual manufacturing overhead for the month of September was

$17,500. For September, manufacturing overhead was

A. overapplied by $2,500

B. underapplied by $2,500

C. correctly applied

D. underapplied by $1,000

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please explain your answer election

Solution

Calculation of underapplied or overapplied overheads

Total direct labor cost for september (for all the three jobs) = Job 1+Job 2+Job 3

= $1,000+$4,500+$2,000 = $7,500

Total Applied Manufacturing Overheads = Total direct labor cost*200%

= $7,500*200% = $15,000

Actual Manufacturing Overheads = $17,500

As the total applied manufacturing overhead is less than actual manufacturing overheads, the manufacturing overheads was under applied for the month of september by $2,500 ($17,500-$15,000).

Therefore the correct option is B)  underapplied by $2,500.