Edwards Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $1,800,000 for the year, and machine usage is estimated at 200,000 hours. In January, $186,000 of overhead costs are incurred and 22,000 machine hours are used. For the remainder of the year, $1,940,000 of additional overhead costs are incurred and 214,000 additional machine hours are worked. 1. Compute the manufacturing overhead rate for the year.
2. What is the amount of over- or underapplied overhead at January 31?
3. What is the amount of over- or underapplied overhead at December 31?

Instructions are below.

Explanation:

Giving the following information:

Overhead costs are expected to total $1,800,000 for the year, and machine usage is estimated at 200,000 hours.

January:

$186,000 of overhead costs are incurred and 22,000 machine hours are used.

The remainder of the year:

$1,940,000 of additional overhead costs are incurred and 214,000 additional machine hours are worked.

To calculate the predetermined manufacturing overhead rate we need to use the following formula:

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

Predetermined manufacturing overhead rate= 1,800,000 / 200,000

Predetermined manufacturing overhead rate= $9 per machine-hours

Now, we can determine over/under allocation:

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

Under/over applied overhead= real overhead - allocated overhead

January:

Allocated MOH= 9*22,000= $198,000

Under/over applied overhead= 186,000 - 198,000= $12,000 overallocated

Rest of the year:

Allocated MOH= 9*214,000= 1,926,000

Under/over applied overhead= 1,940,000 - 1,926,000= $14,000 underallocated

For the whole year:

Allocated MOH= 9*236,000= 2,124,000

Under/over applied overhead= 2,126,000 - 2,124,000= $2,000 underallocated

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