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Mr. Gregory White, Master's Degree
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# Let's compute underapplied or overapplied overhead

### Resolved Question:

Let's compute underapplied or overapplied overhead for our Pearly Company example. Recall the following information related to this example.

Estimated total overhead costs – \$640,000
Estimated total direct labor hours – 160,000
Predetermined overhead rate – \$4 per direct labor hour

Let’s assume the following.

Actual direct labor hours – 170,000

In this case, the overapplied overhead will be \$30,000 and it is calculated as follows.

Step 1 – Calculate the overhead that was applied by taking the actual direct labor hours incurred times the predetermined overhead rate. 170,000 x \$4 = \$680,000

Step 2 – Compare actual manufacturing costs to the applied overhead for the accounting period = \$650,000 - \$680,000 = \$30,000 OVERapplied

Now use:

Estimated total overhead costs – \$340,000
Estimated total direct labor hours – 60,000
Predetermined overhead rate – \$5 per direct labor hour

And the actuals were:

Actual direct labor hours – 70,000

Compute the Over or Under Applied

Now you change the numbers again and compute it - are you noticing a pattern?
Submitted: 5 years ago.
Category: Multiple Problems
Expert:  Mr. Gregory White replied 5 years ago.

Okay, I think the actual in the second one you posted was 330,000 - if not, let me know

70,000*5=350,000

330,000-350,000= \$20,000 over applied

Changing the numbers again

Estimated total overhead costs - \$720,000
Estimated total direct labor hours - 180,000
Predetermined overhead rate - \$4 per direct labor hour

Let's assume the following.

Actual direct labor hours - 190,000

Therefore

190,000*4=760,000

730,000-760,000=\$30,000 over applied

The pattern that is develop here is that the over applied is staying constant when the ratios are being held relatively constant.