(Appendix 2B) The management of Featheringham Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The company's controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours and the estimated amount of the allocation base for the upcoming year is 62,000 machine-hours. Capacity is 75,000 machine-hours and the actual level of activity for the year is assumed to be 59,000 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $2,836,500 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Z77W which required 410 machine-hours.
-If the company bases its predetermined overhead rate on capacity,what would be the cost of unused capacity reported on the income statement prepared for internal management purposes?
A) $137,250
B) $605,120
C) $491,660
D) $467,870

Question

Quizplus · Accepted Answer

Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $2,836,500 ÷ 75,000 machine-hours = $37.82 per machine-hour
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(Appendix 2B) the Management of Featheringham Corporation Would Like to Investigate