The Management of Plitt Corporation Would Like to Investigate the Possibility

question 369

Multiple Choice

The management of Plitt 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 69,000 machine-hours. Capacity is 92,000 machine-hours and the actual level of activity for the year is assumed to be 75,000 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 $772,800 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Q20L which required 380 machine-hours.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) $193,200
• B) $67,200
• C) $61,824
• D) $142,800

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Definitions:

Flexible Budget

A budget that adjusts or flexes with changes in volume or activity levels, allowing for more precise cost control.

Food And Supplies

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Tenant-Days

A measure used in property management representing the sum total of days each tenant occupies a space over a certain period.

Spending Variance

The difference between the actual amount spent and the budgeted amount for a particular item or category.