Company, Inc. applies overhead on the basis of direct labour hours. At the beginning of the year, Company, Inc. estimates overhead to be $540,000, machine hours to be 150,000, and direct labour hours to be 90,000. During January, Company, Inc. has 8,000 direct labour hours and 12,000 machine hours.
-Refer to the Figure.Suppose the actual overhead for January is $51,000.What is the overhead variance?
A)$800 overapplied
B)$800 underapplied
C)$3,000 overapplied
D)$3,000 underapplied

Question

Quizplus · Accepted Answer

First, we need to calculate the predetermined overhead rate using the estimated overhead and labour hours.
Predetermined overhead rate = Estimated overhead / Estimated direct labour hours
Predetermined overhead rate = $540,000 / 90,000
Predetermined overhead rate = $6 per direct labour hour

Next, we can calculate the amount of overhead that should have been applied using this predetermined overhead rate:
Overhead applied = Predetermined overhead rate x Actual direct labour hours
Overhead applied = $6 x 8,000
Overhead applied = $48,000

Finally, we can calculate the overhead variance by subtracting the actual overhead from the overhead applied:
Overhead variance = Overhead applied - Actual overhead
Overhead variance = $48,000 - $51,000
Overhead variance = -$3,000

Since the overhead variance is negative, it means that actual overhead is more than overhead applied. Therefore, it is underapplied. The best choice is D, $3,000 underapplied.