The management of Crapser 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 58,000 machine-hours. In addition, capacity is 67,000 machine-hours and the actual level of activity for the year is 59,000 machine-hours. All of the manufacturing overhead is fixed and is $2,098,440 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) $250,560 Underapplied
B) $36,180 Underapplied
C) $250,560 Overapplied
D) $36,180 Overapplied

Question

Quizplus · Accepted Answer

The predetermined overhead rate based on capacity is $2,098,440 / 67,000 machine-hours = $31.32 per machine-hour. Applied overhead at actual activity is 59,000 machine-hours * $31.32 = $1,847,880. The actual overhead is $2,098,440, so the overhead is underapplied by $2,098,440 - $1,847,880 = $250,560.

The Management of Crapser Corporation Would Like to Investigate the Possibility