During 2020, Bryon Manufacturing expected Job No. 42 to cost $300,000 of overhead, $500,000 of materials, and $200,000 in labor. Byron applied overhead based on direct labor cost. Actual production required an overhead cost of $295,000, $570,000 in materials used, and $220,000 in labor. All of the goods were completed. How much is the amount of over- or underapplied overhead?
1) $35,000 underapplied
2) $5,000 overapplied
3) $5,000 underapplied
4) $35,000 overapplied
The predetermined overhead rate can be calculated as follows:
Predetermined Overhead Rate = Estimated Overhead / Estimated Direct Labor Cost
= $300,000 / $200,000
= $1.50 per direct labor dollar
The overhead applied to Job No. 42 can be calculated as:
Overhead Applied = Actual Direct Labor Cost x Predetermined Overhead Rate
= $220,000 x $1.50
= $330,000
The difference between the applied overhead and the actual overhead is the amount of over- or underapplied overhead:
Overapplied / Underapplied Overhead = Applied Overhead - Actual Overhead
= $330,000 - $295,000
= $35,000 underapplied
Therefore, the answer is 1) $35,000 underapplied.