The Management of Holdaway Corporation Would Like to Investigate the Possibility

question 138

Multiple Choice

The management of Holdaway 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 79,000 machine-hours. Capacity is 88,000 machine-hours and the actual level of activity for the year is assumed to be 74,900 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 $5,700,640 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, what would be the cost of unused capacity reported on the income statement prepared for internal management purposes?

• A) $295,856
• B) $848,618
• C) $583,020
• D) $552,762

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Definitions:

Rectification

The legal process of amending a document or agreement to reflect what the parties intended to agree upon.

Privity Of Contract

A principle that contract terms apply only to the actual parties to the contract

Privity Of Contract

A doctrine in contract law that states only the parties involved in the contract have the right to sue or be sued on its terms.

Lease

A contractual arrangement calling for the lessee (user) to pay the lessor (owner) for use of an asset for a specified period of time.