Problem:
The following calendar year information about the Tahoma Corporation is available on December 31:
Advertising expense........................................ $ 28,800
Depreciation of factory equipment .......................42,320
Depreciation of office equipment .........................10,800
Direct labor......................................................142,600
Factory utilities ..................................................35,650
Interest expense ............................................... 6,650
Inventories, January 1:
Raw materials .................................................... 3,450
Goods in process .............................................. 17,250
Finished goods ................................................. 35,650
Inventories, December 31:
Raw materials .................................................... 2,300
Goods in process .............................................. 20,700
Finished goods ................................................. 31,050
Raw materials purchases................................... 132,450
Rent on factory building ......................................41,400
Indirect labor .....................................................51,750
Sales commissions .............................................16,500
The company applies overhead on the basis of 125% of direct labor costs.
a. Calculate the amount of over- or under-applied overhead.
b. What is the significance of this over- or under-applied amount of overhead?