Clear Colors Corporation uses a predetermined overhead rate based on direct labor costs to apply manufacturing overhead to jobs. At the beginning of the year the Corporation estimated its total manufacturing overhead cost at $350,000 and its direct labor costs at $200,000. The actual overhead cost incurred during the year was $362,000 and the actual direct labor costs incurred on jobs during the year was $208,000. The manufacturing overhead for the year would be:a. $12,000 underapplied
b. $2,000 overapplied
c. $12,000 overapplied
d. $2,000 underapplied

b. $ 2,000 overapplied

Explanation:

Firstly, we need to determine the predetermined overhead rate based on direct labor costs.

Estimated total manufacturing Overhead                        $ 350,000

Estimated direct labour costs                                            $ 200,000

Predetermined overhead rate $ 350,000 / $ 200,000   $ 1.75 per $ of direct labour costs.

The total manufacturing overhead applied on direct labor costs of $ 208,000, is:

$ 208,000 * $ 1.75                                                               $ 364,000

Actual overhead costs incurred                                          $ 362,000

Manufacturing overhead over applied                               $      2,000

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