Martinez Manufacturing applies overhead based on direct labor hours. The company estimates that their overhead for the year will be $180,000, and that they will use 72,000 direct labor hours. During the year, Martinez Manufacturing actually used 75,000 direct labor hours and actual overhead costs were $190,000. At the end of the year, manufacturing overhead was: Overapplied by $2,500. Overapplied by $10,000. Underapplied by $2,500. Underapplied by $10,000.

The correct answer is C: underapplied by $2,500

Explanation:

Giving the following information:

Martinez Manufacturing applies overhead based on direct labor hours.

The company estimates that their overhead for the year will be $180,000 and that they will use 72,000 direct labor hours.

During the year, Martinez Manufacturing used 75,000 direct labor hours and actual overhead costs were $190,000

We need to calculate if the overhead was under or over applied and in what amount.

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

Predetermined overhead rate = 180000/72000 = $2.5 an hour

Now, we can calculate the amount of overhead allocated:

Overhead allocated = 75000 hours*2.5 = $187,500

Over/under applied = actual overhead - allocated overhead = 190,000 - 185,500 = $2,500 underapplied