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An agency charges designer time at $140 per hour and applies overhead at 35% of direct labor cost. Job 4 uses 20 designer hours. How much overhead is applied to Job 4?
A$1,400
B$700
C$980
D$1,120
Answer & Solution
Correct answer: C. $980
1. Direct labor on Job 4 is 20 hours times $140 per hour, which is $2,800.
2. The overhead driver here is direct labor cost, not hours.
3. Overhead applied is 35% of $2,800, which is $980.
4. Development Costs is debited $980 and Overhead is credited $980.
5. $700 applies 35% to the 20 hours multiplied by a $100 rate, which is not the rate given.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 2.3.1 Comprehensive Example of Job Order Costing Transactions for a Service Company_
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