Adams Manufacturing allocates overhead to production on the basis of direct labor costs. At the beginning of the year, Adams estimated total overhead of $358,700; materials of $401,000 and direct labor of $211,000. During the year Adams incurred $381,300 in materials costs, $377,400 in overhead costs and $215,000 in direct labor costs. Compute the amount of under- or overapplied overhead for the year.

Over/under allocation= $11,900 underallocated

Explanation:

Giving the following information:

At the beginning of the year, Adams estimated total overhead of $358,700; and direct labor of $211,000. During the year Adams incurred $377,400 in overhead costs and $215,000 on direct labor costs.

First, we need to calculate the estimated overhead rate. Then, allocate overhead based on actual direct labor dollars. Finally, determine the under/over allocation.

To calculate the estimated manufacturing overhead rate we need to use the following formula:

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

Estimated manufacturing overhead rate= 358,700/211,00= $1.7 per direct labor dollar

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base

Allocated MOH= 1.7*215,000= $365,500

Finally, we calculate the under/over allocation:

Over/under allocation= real MOH - allocated MOH

Over/under allocation=377,400 - 365,500= $11,900 underallocated

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