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Vandy Company uses a predetermined overhead rate based on direct labor-hours to apply factory overhead to jobs. For the month of November, Vandy's estimated factory overhead cost was $400,000 based on an estimated activity level of 100,000 direct labor-hours. Actual overhead amounted to $425,000 with actual direct labor-hours totaling 110,000 for the month. How much was the overapplied or underapplied overhead?

Group of answer choices
a.$25,000 underapplied
b.$25,000 overapplied
c.$15,000 underapplied
d.$15,000 overapplied

1 Answer

3 votes

Final answer:

The predetermined overhead rate is $4 per direct labor-hour. Applied overhead for November was $440,000, while actual overhead was $425,000, resulting in an overapplied overhead of $15,000 for the month.

Step-by-step explanation:

Vandy Company uses a predetermined overhead rate based on direct labor-hours to apply factory overhead to jobs. The company calculated this rate using the estimated costs and activity levels for a period. For November, the estimated factory overhead cost was $400,000, which was based on an estimated activity level of 100,000 direct labor-hours. This gives us a predetermined overhead rate of $4 per direct labor-hour ($400,000 / 100,000 hours).

Over the course of November, Vandy Company incurred actual overhead costs of $425,000 and actual direct labor-hours of 110,000. To find the applied overhead, we multiply the predetermined overhead rate by the actual labor-hours ($4 per hour × 110,000 hours), which equals $440,000. Since the actual overhead was $425,000, we subtract this from the applied overhead ($440,000 - $425,000) to determine whether there is overapplied or underapplied overhead.

In this case, the company has $15,000 overapplied overhead ($440,000 applied - $425,000 actual), meaning the company applied more overhead to the jobs than the actual overhead costs.

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