Minstrel Manufacturing uses a job order costing system. During one month, Minstrel purchased $201,000 of raw materials on credit; issued materials to production of $198,000 of which $27,000 were indirect. Minstrel incurred a factory payroll of $153,000, of which $37,000 was indirect labor. Minstrel uses a predetermined overhead application rate of 150% of direct labor cost. If Minstrel incurred total overhead costs of $180,000 during the month, compute the amount of under- or overapplied overhead:

Underapplied overhead=  $6,000

Explanation:

Giving the following information:

Direct labor= $153,000 - $37,000= $116,000

The predetermined overhead application rate= 150% of direct labor cost.

Actual overhead= $180,000

First, we need to allocate overhead:

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

Allocated MOH= 116,000*1.5= $174,000

Now, we can calculate the over/under allocation:

Under/over applied overhead= real overhead - allocated overhead

Under/over applied overhead= 180,000 - 174,000

Under/over applied overhead=  $6,000 underallocated

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