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:

Unused Capacity

The portion of a company's production potential that is not being utilized to manufacture goods or provide services.

Estimated Activity

An approximation of the amount of work or level of effort needed for a particular task or project.

Activity at Capacity

The level of operational activity that a company can achieve using its current resources without incurring additional costs.

Machine-Hours

A measure of the amount of time machines are used in the production process, often related to the allocation of manufacturing overhead.