Predetermined Overhead Rate; Applying Overhead; Underapplied or Overapplied Overhead [LO 4-1, LO 4-2, LO 4-4)

Medusa Products uses a job-order costing system. Overhead costs are applied to jobs on the basis of machine-hours. At the beginning of the year, management estimated that the company would work 85,000 machine-hours and incur $170,000 in manufacturing overhead costs for the year.

1. Compute the company's predetermined overhead rate.

2. Assume that during the year the company actually worked only 80,000 machine-hours and incurred $168,000 of manufacturing overhead costs. Compute the amount of underapplied or overapplied overhead for the year.

3. Explain why the manufacturing overhead was underapplied or overapplied for the year.