The Management of Crapser Corporation Would Like to Investigate the Possibility

question 17

Multiple Choice

The management of Crapser 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 58,000 machine-hours. In addition, capacity is 67,000 machine-hours and the actual level of activity for the year is 59,000 machine-hours. All of the manufacturing overhead is fixed and is $2,098,440 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 the estimated amount of the allocation base for the upcoming year, by how much was manufacturing overhead underapplied or overapplied?

• A) $36,180 Overapplied
• B) $250,560 Overapplied
• C) $36,180 Underapplied
• D) $250,560 Underapplied

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Definitions:

Team Production

A production process in which employees work together under the supervision of the owner or the owner’s representative.

Contracting Out

The practice of hiring external organizations or individuals to perform services or create goods that were previously done in-house.

Principal Agent Problem

A dilemma in economics and organizational theory where one party (the agent) is supposed to act in the best interest of another party (the principal) but might act in their own interest instead.

Shirking

Working at less than the expected rate of productivity, which reduces output. Shirking is more likely when workers are not monitored, so that the cost of lower output falls on others.