To determine whether manufacturing overhead is underapplied or overapplied, we compare the actual manufacturing overhead with the overhead applied to production.
Step 1: Identify the Given Information
Actual direct labor hours = 14,000 hours
Actual direct labor cost = $210,000
Actual manufacturing overhead = $225,000
Predetermined overhead rate = 115% of direct labor cost
Important: The 14,000 direct labor hours are not needed because overhead is applied based on direct labor COST, not direct labor HOURS.
Step 2: Calculate Applied Manufacturing Overhead
Formula:
Applied Overhead = Direct Labor Cost × Predetermined Overhead Rate
Substitute:
Applied Overhead = $210,000 × 115%
Applied Overhead = $210,000 × 1.15
Applied Manufacturing Overhead = $241,500
Step 3: Determine Underapplied or Overapplied Overhead
Compare the two amounts:
Actual Overhead = $225,000
Applied Overhead = $241,500
Difference:
$241,500 - $225,000 = $16,500
Because applied overhead is GREATER than actual overhead, the company applied too much overhead to production.
Therefore:
Manufacturing overhead is OVERAPPLIED by $16,500.
Step 4: Prepare the Manufacturing Overhead T-Account
Manufacturing Overhead
DEBIT (Actual OH) | CREDIT (Applied OH)
$225,000 | $241,500
|
| Balance: $16,500 credit
The debit side records actual overhead incurred.
The credit side records overhead applied to production.
Since the credit side exceeds the debit side by $16,500, the account has a $16,500 credit balance before adjustment.
Step 5: Closing the Overapplied Overhead (If Required)
If the company closes the entire overapplied overhead balance to Cost of Goods Sold, the adjusting entry would be:
Debit: Manufacturing Overhead $16,500
Credit: Cost of Goods Sold $16,500
This closes the Manufacturing Overhead account and reduces Cost of Goods Sold.
Final Answer:
Applied Manufacturing Overhead = $241,500
Actual Manufacturing Overhead = $225,000
Overapplied Manufacturing Overhead = $16,500
The Manufacturing Overhead T-account has a $16,500 credit balance before adjustment.
Easy Way to Remember:
Applied > Actual = OVERAPPLIED
Actual > Applied = UNDERAPPLIED
And always pay attention to the allocation base! Since the overhead rate is based on direct labor cost, the direct labor hours are irrelevant to this calculation.
