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