The management of Digges Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The Corporation'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 51,000 machine-hours. In addition, capacity is 63,000 machine-hours and the actual level of activity for the year is 53,300 machine-hours. All of the manufacturing overhead is fixed and is $1,702,890 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 Corporation bases its predetermined overhead rate on capacity, by how much was manufacturing overhead underapplied or overapplied?
A)$76,797 Overapplied
B)$262,191 Overapplied
C)$262,191 Underapplied
D)$76,797 Underapplied

Question

Quizplus · Accepted Answer

The predetermined overhead rate based on activity at capacity is calculated as follows:
Predetermined overhead rate = Total estimated manufacturing overhead / Total estimated allocation base at capacity
= $1,702,890 / 63,000 machine-hours
= $27.02 per machine-hour

The manufacturing overhead applied for the year is calculated as follows:
Manufacturing overhead applied = Actual level of activity * Predetermined overhead rate
= 53,300 machine-hours * $27.02 per machine-hour
= $1,440,506

The manufacturing overhead incurred for the year is $1,702,890. Therefore, manufacturing overhead was underapplied by:
Underapplied overhead = Actual manufacturing overhead incurred - Manufacturing overhead applied
= $1,702,890 - $1,440,506
= $262,384

Therefore, the answer is C) $262,191 Underapplied.

The Management of Digges Corporation Would Like to Investigate the Possibility