At the beginning of the year, manufacturing overhead for the year was estimated to be $670,700.At the end of the year, actual direct labor-hours for the year were 36,200 hours, the actual manufacturing overhead for the year was $665,700, and manufacturing overhead for the year was overapplied by $22,100.If the predetermined overhead rate is based on direct labor-hours, then the estimated direct labor-hours at the beginning of the year used in the predetermined overhead rate must have been:

A) 35,037 direct labor-hours
B) 35,300 direct labor-hours
C) 36,200 direct labor-hours
D) 33,874 direct labor-hours

Question

Janna Carroll · Accepted Answer

Final Answer : B, Explanation :  The predetermined overhead rate is calculated by dividing the estimated manufacturing overhead for the year by the estimated direct labor-hours for the year.Predetermined overhead rate = Estimated manufacturing overhead / Estimated direct labor-hours$670,700 / Estimated direct labor-hours = Predetermined overhead rateWe can rearrange this equation to solve for estimated direct labor-hours:Estimated direct labor-hours = Estimated manufacturing overhead / Predetermined overhead rateSince the actual manufacturing overhead for the year was less than the estimated manufacturing overhead, the predetermined overhead rate was too high. This caused the overapplied overhead.We know that actual direct labor-hours for the year were 36,200 hours and the predetermined overhead rate was based on estimated direct labor-hours at the beginning of the year.The overapplied overhead can be used to adjust the actual manufacturing overhead to the estimated manufacturing overhead:$665,700 - $22,100 = $643,600 adjusted actual manufacturing overheadWe can then use the adjusted actual manufacturing overhead and the predetermined overhead rate to calculate the estimated direct labor-hours:$643,600 = Predetermined overhead rate x Estimated direct labor-hoursSubstituting the given values:$670,700 / Estimated direct labor-hours = Predetermined overhead rate$643,600 = (670,700 / Estimated direct labor-hours) x 36,200Solving for Estimated direct labor-hours:Estimated direct labor-hours = $670,700 / ($643,600 / 36,200) = 35,300Therefore, the estimated direct labor-hours at the beginning of the year used in the predetermined overhead rate must have been 35,300 direct labor-hours. Underapplied (overapplied)manufacturing overhead = Actual manufacturing overhead - Manufacturing overhead applied-$22,100 = $665,700 - Overhead appliedManufacturing overhead applied = $665,700 + $22,100 = $687,800Manufacturing overhead applied = Predetermined overhead rate × Actual direct labor-hoursPredetermined overhead rate = Manufacturing overhead applied ÷ Actual direct labor-hours= $687,800 ÷ 36,200 direct labor-hours= $19 per direct labor-hourPredetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated direct labor-hoursEstimated direct labor-hours = Estimated total manufacturing overhead ÷ Predetermined overhead rate= $670,700 ÷ $19 per direct labor-hour= 35,300 direct labor-hours

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