Answer (D) is correct . First, the actual production level for the month was 6,000 units of output. Second, the standard number of labor hours consumed per unit of output is 2 (10,000 budgeted direct labor hours ÷ 5,000 budgeted units output). Third, since fixed overhead for the month was budgeted at $80,000 and it is to be applied in proportion to 10,000 budgeted direct labor hours, the application rate is $8 per direct labor hour ($80,000 ÷ 10,000). Thus, the amount of fixed overhead applied for the month was $96,000 = (6,000 × $8 × 2). The fixed overhead budget variance was $2,000 favorable, which means the actual fixed overhead incurred for the month was $78,000 ($80,000 – $2,000). Thus, fixed overhead was overapplied by $18,000 ($96,000 – $78,000).
Answer (A) is incorrect because Misinterpreting the $2,000 favorable budget (spending) variance results in $2,000 underapplied.
Answer (B) is incorrect because Reversing the proper order of subtraction results in $16,000 underapplied.
Answer (C) is incorrect because The production-volume variance is $16,000 overapplied.
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During May, 6,000 units were produced and the fixed overhead budget variance was $2,000 favorable. Fixed overhead during May was