Freeman Company uses a predetermined overhead rate based on direct labour hours to apply manufacturing overhead to jobs. At the beginning of the year, the company estimated manufacturing overhead would be $150,000 and direct labour hours would be 10,000. The actual figures for the year were $186,000 for manufacturing overhead and 12,000 direct labour hours.

The cost records for the year will show which of the following?

A. overapplied overhead of $30,000.

B. underapplied overhead of $30,000.

C. overapplied overhead of $6,000.

D. underapplied overhead of $6,000.

Answer: D. underapplied overhead of $6,000.

Explanation:

First we find the Pre-determined overhead rate and we can see that the company estimated manufacturing overhead would be $150,000 and direct labour hours would be 10,000.

So the Pre-determined rate is,

= 150,000/10,000

= $15 per direct labour hour.

We then calculate the actual Applied Overhead. The actual direct labour was 12,000 so calculating we have,

= 15 * 12,000

= $180,000

Now we then calculate for the Underapplied or (Overapplied) manufacturing overhead amount.

The formula is,

Underapplied (Overapplied) Manufacturing = Actual Manufacturing Overhead - Applied Manufacturing Overhead

Underapplied (Overapplied) = 186,000 - 180,000

= $6,000

It is a positive number so it is $6,000 underapplied therefore option D is correct.