Intercontinental Company bases its predetermined overhead rate on direct labor hours. At the beginning of the current year, the company estimated that its manufacturing overhead would total $440,000 during the year. During the year, the company incurred $400,000 in actual manufacturing overhead costs. The Manufacturing Overhead account showed that overhead was underapplied by $16,000 during the year. If the predetermined overhead rate was $40.00 per direct labor hour, how many hours were worked during the year?

Question

BlackTom AI · Accepted Answer

Predetermined overhead rate is applied to actual direct labor hours to compute applied overhead: Applied MOH = POR × actual direct labor hours. Underapplied overhead equals Actual MOH − Applied MOH (a positive underapplied amount means applied was less than actual).

1) Relevant knowledge and concepts
- Predetermined overhead rate (POR) = estimated manufacturing overhead / estimated direct labor hours, but once set it is used to apply overhead to production as Applied MOH = POR × actual direct labor hours.
- Underapplied overhead = Actual MOH − Applied MOH. If underapplied is positive, applied MOH is smaller than actual MOH.

2) Step-by-step reasoning
- Given: POR = $40.00 per direct labor hour.
- Given: Actual manufacturing overhead = $400,000.
- Given: Overhead was underapplied by $16,000, so Underapplied = Actual − Applied = $16,000.

3) Intermediate calculations
- Solve for Applied MOH: Applied MOH = Actual MOH − Underapplied = $400,000 − $16,000 = $384,000.
- Relate Applied MOH to hours: Applied MOH = POR × hours => $384,000 = $40 × hours.
- Solve for hours: hours = $384,000 / $40 = 9,600 hours.

4) Why this answer is correct
- The calculation directly follows the definitions: applied overhead derived from the predetermined rate times actual hours must equal $384,000 to produce the $16,000 underapplied gap given $400,000 actual overhead. Dividing by the $40 rate yields 9,600 actual hours worked.

5) Why the other options are incorrect
- 11,000 hours would produce applied MOH = 11,000 × $40 = $440,000 (this equals the estimated overhead, i.e., the denominator used to set POR, not the actual applied amount).
- 10,000 hours gives applied MOH = $400,000, which would result in zero under/overapplied (not $16,000).
- 10,600 hours gives applied MOH = $424,000, which would imply overapplied overhead of $24,000 (not an underapplied $16,000).

6) Conclusion
Calculated actual direct labor hours = 9,600 hours, which matches the provided correct answer.

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