Chipata Corporation applies manufacturing overhead to jobs on the basis of machine-hours. Chipata estimated 25,000 machine-hours and $10,000 of manufacturing overhead cost for the year. During the year, Chipata incurred 26,200 machine-hours and $11,300 of manufacturing overhead. What was Chipata's underapplied or overapplied overhead for the year

Answer: overhead was underapplied

Underapplied overhead = $820

Explanation:

Given the following;

Estimated manufacturing overhead = $10,000

Estimated machine-hours = 25000

Actual Machine-hours = 26,200

Actual manufacturing overhead = $11,300

When applied overhead cost is greater than actual overhead, we have over application of overhead, and if applied overhead is less than the actual overhead, then overhead has been under applied.

To determine if manufacturing overhead has been over or under applied, we need to calculate the rate of predetermined overhead

Predetermined overhead rate = Estimated overhead cost : estimated Machine-hours

Predetermined overhead = 10,000 : 25,000 = 0.4

Therefore,

Applied manufacturing overhead = predetermined overhead rate * actual machine-hours

0.4 * $26,200 = $10,480

Therefore difference between applied and actual overhead =

Applied overhead - actual overhead

$10,480 - $11,300 = - $820

$820

Meaning overhead as been under applied

under-applied overhead = $820

Explanation:

Under-applied or over applied-overhead is the difference between absorbed overhead and the actual overhead. To calculate the over or under absorbed overhead we follow the steps below:

Step 1

Calculate the overhead absorption rate

OAR = Budgeted overhead for the period / budgeted machine hours

=$10,000/25,000

= $0.4

Step 2

Determine the absorbed overhead

Absorbed overhead = OAR * actual machine hours

= 0.4 * 26,200

= $ 10,480

Step 3

Determine the over or under absorbed overhead

= Absorbed overhead - actual overhead

= $10,480 - $11,300

Under-applied overhead = $820