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    Over and Underabsorbed Overhead

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    The Alphonse Company allocates fixed overhead costs by machine hours and variable overhead costs by direct labor hours. At the beginning of the year the company expects fixed overhead costs to be $600,000 and variable costs to be $800,000. The expected machine hours are 6,000 and the expected direct labor hours are 80,000. The actual fixed overhead costs are $700,000 and the actual variable overhead costs are $750,000. The actual machine hours during the year are 5,500 and the actual direct labor hours are 90,000.


    a. How much overhead is allocated?

    b. What is the over/underabsorbed overhead?

    I went ahead and broke out the details of Alphonse below. I've seen some work on this by another, but I'm not able to follow the work to understand how this is done. Can anyone help me follow the trail so I can actually understand how this one works? At this point I don't see the logic used to arrive a.) and b.). I'm not convinced that what I came across was actually correct.

    Expected Fixed Overhead: $600,000
    Expected Variable Overhead: $800,000
    Expected Machine Hours: 6,000
    Expected Direct Labor Hours: 80,000

    Actual Fixed Overhead: $700,000
    Actual Variable Overhead: $750,000
    Actual Machine Hours: 5,500
    Actual Direct Labor Hours: 90,000.

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    Solution Preview

    a. In order to calculate the overhead allocated, we first calculate the predetermined overhead rate
    Overhead allocated = predetermined overhead rate X actual hours
    The predetermined overhead rate is calculated based on the estimated cost and estimated hours
    For Fixed overhead
    Predetermined overhead rate = Estimated fixed ...

    Solution Summary

    The solution discusses over and underabsorbed overhead.