Aspen Company estimates its manufacturing overhead to be $625,000 and its direct labor costs to be $500,000 for year 2. Aspen worked on three jobs for the year. Job 2-1, which was sold during year 2, had actual direct labor costs of $195,000. Job 2-2, which was completed, but not sold at the end of the year, had actual direct labor costs of $325,000. Job 2-3, which is still in work-in-process inventory, had actual direct labor costs of $130,000. Actual manufacturing overhead for year 2 was $800,000. Manufacturing overhead is applied on the basis of direct labor costs. Required: a. How much overhead was applied to each job in year 2? b. What was the over- or underapplied manufacturing overhead for year 2?

Answer:

Instructions are below.

Explanation:

First, we need to calculate the predetermined overhead rate:

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Predetermined manufacturing overhead rate= 625,000/500,000

Predetermined manufacturing overhead rate= $1.25 per direct labor dollar

Now, we allocate overhead to each Job:

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base

Job 2-1= 1.25*195,000= 243,750

Job 2-2= 1.25*325,000= 406,250

Job 2-3= 1.25*130,000= 162,500

Total allocated overhead= $812,500

Finally, the under/over allocation overhead:

Under/over applied overhead= real overhead - allocated overhead

Under/over applied overhead= 800,000 - 812,500

Under/over applied overhead= $12,500 overallocated

Manufacturing Over head over applied in job 2 and year 2 $12,500.

What information do we have?

Actual manufacturing overhead = $800,000

Applied overhead in job 2 year 1 = $195000 × 125%

Applied overhead in job 2 year 1 = $243750

Applied overhead in job 2 year 2 = $325000 × 125%

Applied overhead in job 2 year 2 = $406250

Applied overhead in job 2 year 3 = $130000 × 125%

Applied overhead in job 2 year 3 = $162500

Total Applied overhead = $243750 + $406250 + $162500

Total Applied overhead = $812,500

Overhead over applied = $812,500 - $800,000

Overhead over applied = $12,500

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