Winston Company estimates that the factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 50,000 hours. The total machine hours for the year were 54,300. The actual factory overhead for the year was $1,375,000. Determine the over- or underapplied amount for the year. a. $118,250 overapplied
b. $17,500 underapplied
c. $118,250 underapplied
d. $17,500 overapplied

b. $17,500 underapplied

Explanation:

Calculation to Determine the over- or underapplied amount for the year

First step is to find the Pre determined overhead rate using this formula

Pre determined overhead rate = Estimated factory overheads / Estimated machine hours

Pre determined overhead rate = $1,250,000 / 50000

Pre determined overhead rate = $25 per machine hour.

Second step is to find the Factory overhead amount applied using this formula

Factory overhead amount applied = Pre determined overhead rate * Actual machine hours

Factory overhead amount applied = $25 * 54,300

Factory overhead amount applied = $1,357,500

The last step is to calculate for the over- or underapplied amount for the year

Using this formula

Under applied overhead = Applied overhead - Actual overhead

Let plug in the formula

Under applied overhead = $1,357,500 - $1,375,000

Under applied overhead= $17,500

Therefore the underapplied amount for the year is $17,500