Colby Company estimates that annual manufacturing overhead costs will be $600,000. Estimated annual operating activity bases are: direct labor cost $460,000, direct labor hours 40,000 and machine hours 80,000. The actual manufacturing overhead cost for the year was $601,000 and the actual direct labor cost for the year was $456,000. Actual direct labor hours totaled 39,800 and machine hours totaled 79,000. Colby applies overhead based on direct labor hours. Compute the predetermined overhead rate and determine the amount of manufacturing overhead applied. Determine if overhead is over- or underapplied and the amount.

Predetermined rate = $15 per direct labor hour

Overheads Applied = $ 597,000

Underapplied  Overheads = $ 4,000

Explanation:

Predetermined rate is the rate used to allocate manufacturing overheads (indirect costs) to product.

Predetermined rate = Budgeted Overheads/ Budgeted Activity

                                  = $600,000/ 40,000

                                   = $15 per direct labor hour

Overheads Applied are the amount of manufacturing overheads included in the product cost for the manufacturing period.

Overheads Applied = Actual Activity × Predetermined rate

                                  = 39,800 × $15

                                  = $ 597,000

Over or Under -Applied Overheads is the difference in the amount of Overheads Applied and Actual Overhead Cost

Applied manufacturing overhead cost =  $ 597,000

Actual manufacturing overhead cost = $601,000

Actual manufacturing overhead cost > Applied manufacturing overhead cost, therefore we have an underapplied situation

Underapplied  = $601,000 - $ 597,000

                        = $ 4,000

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the answer is a. $209,000