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Scotch Company uses a predetermined overhead rate based on direct labor hours to apply manufacturing overhead to jobs. At the beginning of the year, the company estimated manufacturing overhead would be $400,000 and direct labor hours would be 40,000. The actual figures for the year were $430,000 for manufacturing overhead and 42,000 direct labor hours.
Question 1: Is manufacturing overhead underapplied or overapplied for the year? By how much?
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Discuss the effect this might have on the selection of an allocation base for the application of overhead.
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