Correct Answer Explanation for D:
In order to calculate the amount of overhead that was over- or under applied we need to compare the amount of overhead that was applied during the period with the actual amount of overhead incurred.
Actual overhead during the period was $106,000. We calculate this by adding the $1,000 unfavorable fixed overhead budget variance to the budgeted amount of overhead, which was $105,000.
Overhead is applied using direct labor hours. The budget called for $105,000 of fixed overhead costs and 15,000 direct labor hours. This gives a fixed overhead application rate of $7 per direct labor hour.
During the period, the company produced 8,000 units. Therefore, the number of direct labor hours budgeted for the actual production was 8,000 × 2 direct labor hours per unit, or 16,000 direct labor hours.
Applying $7 per direct labor hour to the 16,000 direct labor hours allowed for the actual production equals the total fixed overhead applied of $112,000.
$112,000 of fixed overhead applied is $6,000 greater than the $106,000 actual fixed overhead cost incurred for the period, so fixed overhead was overapplied by $6,000.
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