The Management of Bauza Corporation Would Like to Investigate the Possibility

question 22

Multiple Choice

The management of Bauza 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 12,000 machine-hours. In addition, capacity is 14,000 machine-hours and the actual level of activity for the year is 11,400 machine-hours. All of the manufacturing overhead is fixed and is $20,160 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 capacity, by how much was manufacturing overhead underapplied or overapplied?

• A) $1,008 Overapplied
• B) $1,008 Underapplied
• C) $3,744 Overapplied
• D) $3,744 Underapplied

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Definitions:

Supplies Cost

The expense associated with purchasing supplies necessary for a company's operations or manufacturing processes.

Planning Budget

A budget designed at the beginning of the budgeting period that is based on a specific level of activity.

Frame

The structural support or skeleton that defines the shape or provides the foundation for a structure or object, such as a building or a piece of machinery.

Variable Overhead Costs

Indirect costs of production that fluctuate with the level of output, such as utilities and indirect labor.