During 2013, Arb Company incurred the following direct labor costs: January $20,000 and February $30,000. Arb uses a predetermined overhead rate of 120% of direct labor cost. Estimated overhead for the 2 months, respectively, totaled $19,500 and $35,700. Actual overhead for the 2 months, respectively, totaled $24,500 and $32,500. Determine if overhead is over- or underapplied for each of the two months and the respective amounts.

Results are below.

Explanation:

Giving the following information:

Predetermined overhead rate= 120% of direct labor cost

First, we need to allocate overhead for the 2 months:

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

Month 1:

Allocated MOH= 20,000*1.2= $24,000

Month 2:

Allocated MOH= 30,000*1.2= $36,000

Now, the over/under allocation:

Under/over applied overhead= real overhead - allocated overhead

Month 1:

Under/over applied overhead= 24,500 - 24,000

Underapplied overhead= $500

Month 2:

Under/over applied overhead= 32,500 - 36,000

Overapplied overhead= $3,500

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