The Management of Westrope Corporation Would Like to Investigate the Possibility

question 14

Essay

The management of Westrope Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated amount of activity for the year. 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 76,000 machine-hours. In addition, capacity is 86,000 machine-hours and the actual activity for the year is 71,000 machine-hours. All of the manufacturing overhead is fixed and is $4,771,280 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 and the actual amount of manufacturing overhead for the year.
Required:
a. Determine the predetermined overhead rate if the predetermined overhead rate is based on the estimated amount of the allocation base.
b. Determine the underapplied or overapplied overhead for the year if the predetermined overhead rate is based on the estimated amount of the allocation base.
c. Determine the predetermined overhead rate if the predetermined overhead rate is based on the amount of the allocation base at capacity.
d. Determine the underapplied or overapplied overhead for the year if the predetermined overhead rate is based on the amount of the allocation base at capacity.

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Definitions:

Cash Dividend

A payment made by a company out of its profits to its shareholders, usually in cash.

Net Income

The net income of a company once all costs and taxes are deducted from its total revenue.

Short-Term Stock Investments

Investments in stocks that are intended to be held for a short period, typically less than one year, for earning quick profits.

Cash Dividends

Payments made by a corporation to its shareholder members. It is the share of profits distributed.