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Energypac Company’s predetermined overhead rate is based on direct
labor hours. At the beginning of the current year, the company estimated that
its manufacturing overhead would total $440,000 during the year. During the
year, the company incurred $400,000 in actual manufacturing overhead costs. The
Manufacturing Overhead account showed that overhead was underapplied by $16,000
during the year. If the predetermined overhead rate was $40.00 per direct labor
hour, how many hours were worked during the year?
First, determine the amount of overhead applied to production by
reference to the information about the Manufacturing Overhead account.
Amount
underapplied = Actual overhead – Amount applied to production
Amount
underapplied = $400,000 – Amount applied to production = $16,000; Amount
applied to production = $384,000
Then, solve for
the direct labor hours here (the activity base for the overhead rate).
Manufacturing
overhead applied = Predetermined overhead rate x Direct labor hours = $384,000
= $40.00 per direct labor hour x Actual direct labor hours; Actual direct labor
hours = 9,600
