EXERCISE 3-16 (CONTINUED)

4. If the actual overhead cost and the actual professional staff hours

charged to clients’ accounts turn out to be exactly as estimated there

would be underapplied overhead as shown below.

2005 2004

Predetermined overhead rate (see above) (a)... $51.75 $51.75

Actual professional staff hours charged to

clients’ accounts (by assumption) (b) ... × 4,600 × 4,500

Overhead applied (a) × (b) ... $238,050 $232,875

Actual overhead cost incurred (by assumption)... 310,500 310,500

Underapplied overhead ... $ 72,450 $ 77,625

The underapplied overhead is best interpreted in this situation as the

cost of idle capacity. Proponents of this method of computing predeter-

mined overhead rates suggest that the underapplied overhead be

treated as a period expense that would be separately disclosed on the

income statement as Cost of Unused Capacity.

© The McGraw-Hill Companies, Inc., 2006. All rights reserved.

Solutions Manual, Chapter 3 89