Sullivan Company Uses a Predetermined Overhead Rate Based on Direct

question 145

Multiple Choice

Sullivan Company uses a predetermined overhead rate based on direct labour hours to allocate manufacturing overhead to jobs. The company estimated that it would incur $500,000 of manufacturing overhead during the year and that 100,000 direct labour hours would be worked. During the year, the company actually incurred manufacturing overhead costs of $590,000 and 120,000 direct labour hours were worked.

By how much was manufacturing overhead overallocated or underallocated for the year?

• A) $10,000 underallocated
• B) $10,000 overallocated
• C) $90,000 underallocated
• D) $90,000 overallocated

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Definitions:

Probability Distribution

A listing, chart, or graph of all possible outcomes, such as expected rates of return, with a probability assigned to each outcome.

Security Market Line

A graphical representation that shows the expected rate of return of an asset as a function of its systematic risk.

Inherent Risk

The possibility of inaccurate financial statements due to factors other than failure of control, covering areas such as industry characteristics and overall economic environment.

SML

The Security Market Line, a graphical representation of the Capital Asset Pricing Model showing the relationship between the expected return of a security and its beta (systematic risk).