Westan Corporation uses a predetermined overhead rate of $23.20 per direct labor-hour. This predetermined rate was based on a cost formula that estimated $278,400 of total manufacturing overhead for an estimated activity level of 12,000 direct labor-hours.
The company incurred actual total manufacturing overhead costs of $268,000 and 10,500 total direct labor-hours during the period.
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To determine the applied overhead and analyze the difference between actual and applied overhead, follow these steps:
Step 1: Calculate the applied overhead:
To calculate the applied overhead, multiply the actual direct labor-hours by the predetermined overhead rate.
Applied Overhead = Predetermined Overhead Rate × Actual Direct Labor-Hours
Given:
Predetermined Overhead Rate = $23.20 per direct labor-hour
Actual Direct Labor-Hours = 10,500
Applied Overhead = $23.20 × 10,500
Applied Overhead = $243,600
Step 2: Calculate the difference between actual and applied overhead:
To find the difference between the actual and applied overhead, subtract the actual total manufacturing overhead costs from the applied overhead.
Difference = Applied Overhead - Actual Total Manufacturing Overhead Costs
Given:
Actual Total Manufacturing Overhead Costs = $268,000
Difference = $243,600 - $268,000
Difference = -$24,400
The negative difference indicates that the actual overhead costs were greater than the applied overhead by $24,400.