(Appendix 4B)The management of Wray 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 68, 000 machine-hours.In addition, capacity is 79, 000 machine-hours and the actual level of activity for the year is 63, 500 machine-hours.All of the manufacturing overhead is fixed and is $3, 384, 360 per year.For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity.It is further assumed that this is also the actual amount of manufacturing overhead for the year. If the company bases its predetermined overhead rate on capacity, by how much was manufacturing overhead underapplied or overapplied?
A)$664, 020 Underapplied
B)$223, 965 Overapplied
C)$664, 020 Overapplied
D)$223, 965 Underapplied

Question

Quizplus · Accepted Answer

Under the new system, the predetermined overhead rate would be calculated as:
Predetermined overhead rate = Estimated manufacturing overhead / Estimated activity at capacity
= $3,384,360 / 79,000 machine-hours
= $42.80 per machine-hour

Using this rate, the manufacturing overhead applied to production would be:
Applied manufacturing overhead = Predetermined overhead rate x Actual activity level
= $42.80 per machine-hour x 63,500 machine-hours
= $2,720,300

The actual manufacturing overhead for the year is given as $3,384,360, which is more than the applied overhead of $2,720,300. Therefore, there is underapplied overhead.

Underapplied overhead = Actual manufacturing overhead - Applied manufacturing overhead
= $3,384,360 - $2,720,300
= $664,060

Hence, the correct answer is A) $664,020 underapplied.

(Appendix 4B)The Management of Wray Corporation Would Like to Investigate