I need to know why the answer is $30,000. If we do not have the actual total overhead manufacturing cost. How do we calculate it!! See below problem and solution. Generally, actual manufacturing o

I need to know why the answer is $30,000. If we do not have the actual total overhead manufacturing cost. How do we calculate it!!

See below problem and solution.

Generally, actual manufacturing overhead costs will not match the amount of overhead that has been applied to jobs (Work in Process) for the period. This difference is called underapplied overhead or overapplied overhead.

Underapplied overhead occurs when the amount of overhead applied to jobs is less than the overhead actually incurred.

Overapplied overhead occurs when the amount of overhead applied to jobs is greater than the overhead actually incurred.

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 overhead – $650,000

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

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