The Management of Satellite Corporation Would Like to Investigate the Possibility

question 47

Essay

The management of Satellite Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated amount of activity for the year. 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 13,000 machine-hours. In addition, capacity is 16,000 machine-hours and the actual activity for the year is 12,900 machine-hours. All of the manufacturing overhead is fixed and is $29,120 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 and the actual amount of manufacturing overhead for the year.
Required:
a. Determine the predetermined overhead rate if the predetermined overhead rate is based on the amount of the allocation base at capacity.
b. Determine the underapplied or overapplied overhead for the year if the predetermined overhead rate is based on the amount of the allocation base at capacity.

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Definitions:

Economies of Scale

Cost advantages that enterprises obtain due to their scale of operation, leading to cost per unit of output decrease with increasing scale.

Average Fixed Costs

The constant expenses in production, which remain unchanged regardless of output levels, when divided by the volume of output created.

U-shaped

A description often used in economics to describe the graphical representation of a situation where certain costs initially decrease, reach a minimum, and then start to increase as output expands.

TVC

Total Variable Cost; the entire cost associated with producing a given output level that varies with the quantity of output.