1. Based on the information given, what are possible causes for the difference between allocated and actual overhead?
2. What steps, if any, can a business take to minimize differences between allocated and actual overhead?
3. What is the impact on a business' income statement if overhead is consistently underapplied to jobs?

Stanford Enterprises uses job-order costing. Overhead is applied on the basis of direct labor hours.

The following information relates to the year just ended.

Data:
Estimated total overhead costs	$275,000
Estimated total direct labor hours	25,000
Actual total direct labor hours	27,760
Actual costs for the year:
Purchase of raw (direct) materials	$375,000
Direct labor cost	$536,300
Manufacturing overhead	$302,750
Inventories:	Beginning	Ending
Raw (Direct) Materials	$15,000	$11,375
Work in Process	27,875	22,350
Finished Goods	34,600	26,450

1. Overhead:
Actual overhead cost		$302,750
Predetermined overhead rate	$11.00
Actual direct labor hours	27,760
Total overhead applied		305,360
(Over) or under applied overhead		($2,610)

Stanford Enterprises
Schedule of Cost of Goods Manufactured
Direct materials:
Raw materials inventory, beginning	$15,000
Add: Purchases of raw materials	375,000
Total raw materials available	$390,000
Deduct: Raw materials inventory, ending	11,375
Raw materials used in production		$378,625
Direct labor		536,300
Applied manufacturing overhead		305,360
Total manufacturing costs		$1,220,285
Add: Beginning work in process inventory		27,875
Total cost of work in process		$1,248,160
Deduct: Ending work in process inventory		22,350
Cost of goods manufactured		$1,225,810

Stanford Enterprises
Schedule of Cost of Goods Sold
Finished goods inventory, beginning	$34,600
Add: Cost of goods manufactured	1,225,810
Cost of goods available for sale	$1,260,410
Deduct: Finished goods inventory, ending	26,450
Unadjusted cost of goods sold	$1,233,960
Underapplied (overapplied) overhead	-2,610
Adjusted cost of goods sold	$1,231,350