Question

Given the following, calculate the total over or underapplied overhead (i.e., the total overhead cost variance for the period) assuming the company uses a standard cost system:

Budgeted production: 10,000 units with each unit requiring 2.5 machine hours
Standard overhead application rate: $17 per machine hour
Actual production: 9,500 units
Actual machine hours used: 24,500
Actual overhead cost: $410,000

A) $12,750 overapplied
B) $12,750 underapplied
C) $2,750 overapplied
D) $2,750 underapplied

Answer 1

To calculate the total over or underapplied overhead, subtract the applied overhead cost from the actual overhead cost.

To calculate the total over or underapplied overhead, we need to compare the actual overhead cost with the applied overhead cost.

Here's the step-by-step calculation:

1. Calculate the standard overhead cost by multiplying the standard overhead application rate with the actual machine hours used: Standard overhead cost = Standard overhead application rate x Actual machine hours used = $17 x 24,500 = $416,500
2. Calculate the applied overhead cost by multiplying the standard overhead application rate with the actual production: Applied overhead cost = Standard overhead application rate x Actual production = $17 x 9,500 = $161,500
3. Calculate the total over or underapplied overhead by subtracting the applied overhead cost from the actual overhead cost: Total over or underapplied overhead = Actual overhead cost - Applied overhead cost = $410,000 - $161,500 = $248,500

Therefore, the correct answer is D) $2,750 underapplied.