Victryl Company applies overhead based on direct labor hours. At the beginning of the year, Victryl estimates overhead to be $700,000, machine hours to be 200,000, and direct labor hours to be 35,000. During February, Victryl has 5,000 direct labor hours and 10,000 machine hours.

If the actual overhead for February is $98,300, what is the overhead variance, and is it overapplied or underapplied?

a.$1,700 overapplied
b.$600 overapplied
c.$1,000 underapplied
d.$1200 underapplied
e.$800 overapplied

a.$1,700 over applied

Explanation:

For computing the overhead variance, first we have to compute the predetermined overhead rate which is shown below:

Predetermined overhead rate = (Total estimated manufacturing overhead) ÷ (estimated direct labor-hours)

= $700,000 ÷ 35,000 hours

= $20

Now we have to find the applied overhead which equal to

= Actual direct labor-hours × predetermined overhead rate

= 5,000 hours × $20

= $100,000

So, the overhead variance equals to

= Actual manufacturing overhead - applied overhead

= $98,300 - $100,000

= $1,700 over-applied

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