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:

A) underapplied overhead of $6,000.
B) overapplied overhead of $6,000.
C) underapplied overhead of $30,000.
D) overapplied overhead of $30,000.

To calculate the applied overhead, first we need to calculate the predetermined overhead rate:

Predetermined overhead rate = Estimated manufacturing overhead ÷ Estimated direct labour hours
= $150,000 ÷ 10,000 hours
= $15 per direct labour hour

Then, we can calculate the applied overhead:

Applied overhead = Predetermined overhead rate x Actual direct labour hours
= $15 per hour x 12,000 hours
= $180,000

The difference between the actual manufacturing overhead and the applied manufacturing overhead is:

Actual manufacturing overhead - Applied manufacturing overhead
= $186,000 - $180,000
= $6,000

This means that overhead was underapplied by $6,000, and this amount will need to be closed out to the Cost of Goods Sold account at the end of the year.