(Appendix 4B)The Management of Digges Corporation Would Like to Investigate

question 25

Multiple Choice

(Appendix 4B) The management of Digges Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity.The Corporation'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 51, 000 machine-hours.In addition, capacity is 63, 000 machine-hours and the actual level of activity for the year is 53, 300 machine-hours.All of the manufacturing overhead is fixed and is $1, 702, 890 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 Corporation bases its predetermined overhead rate on capacity, by how much was manufacturing overhead underapplied or overapplied?

• A)$76, 797 Overapplied
• B)$262, 191 Overapplied
• C)$262, 191 Underapplied
• D)$76, 797 Underapplied

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Definitions:

Predetermined Factory Overhead Rate

A rate calculated before a period begins, used to allocate estimated overhead costs based on a selected activity base to individual products.

Actual Activity Base

A measure used to allocate costs based on the actual level of activity or usage, often used in budgeting and accounting.

Predetermined Overhead Rate

An estimated charge used to assign manufacturing overhead costs to individual units of production, calculated before the period begins.

Direct Labor Hours

Direct Labor Hours refer to the amount of time spent by workers directly involved in the production of goods or services, used as a basis for allocating labor costs to products.