Denver Company prints custom training materials for corporations. The business was started on January 1, 2013 and uses a job-order costing system. Manufacturing overhead is applied to jobs based on prime cost (direct materials and direct labor costs).The following information is available for 2013:Estimated Manufacturing Overhead Costs : $315,000Estimated Direct Material Costs : $150,000Estimated Direct Labor Costs : $225,000Actual Direct Materials Cost : $148,500Actual Direct Labor Cost : $213,500Actual Manufacturing Overhead Cost : 318,500
Required:1. What is the under applied or overapplied overhead cost for Denver Company?

Over/under allocation= $14,420 underallocated

Explanation:

Giving the following information:

Manufacturing overhead is applied to jobs based on prime cost (direct materials and direct labor costs).

The following information is available for 2013:

Estimated Manufacturing Overhead Costs : $315,000

Estimated Direct Material Costs : $150,000

Estimated Direct Labor Costs : $225,000

Actual Direct Materials Cost : $148,500

Actual Direct Labor Cost : $213,500

Actual Manufacturing Overhead Cost : 318,500

First, we need to calculate the predetermined overhead rate:

Estimated manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Estimated manufacturing overhead rate= 315,000/(150,000 + 225,000)= $0.84 per prime cost dollar

Now, we can allocate overhead:

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

Allocated MOH= 0.84* (148,500 + 213,500)= $304,080

To determine under or over allocation, we need to use the following formula:

Over/under allocation= real MOH - allocated MOH

Over/under allocation= 318,500 - 304,080= 14,420 underallocated

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