The management of Sharrar Corporation would like to investigate the possibility
ID: 2361938 • Letter: T
Question
The management of Sharrar Corporation would like toinvestigate 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 45,000 machinehours.
In addition, capacity is 52,000 machine-hours and
the actual activity for the year is 47,100 machine-hours. All
of the manufacturing overhead is fixed and is $1,029,600
per year. For simplicity, it’s 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.
Explanation / Answer
1. capacity is 52,000 machine-hours 2. Est amount of the allocation base for the upcoming year is 45,000 machinehours 3. actual activity for the year is 47,100 machine-hours 4. manufacturing overhead is fixed and is $1,029,600 A. Determine the predetermined overhead rate if the predetermined overhead rate is based on the estimated amount of the allocation base. PreDetermined OH rate = Mfg OH/Est McHrs = 1029600/45000 = $22.88 per McHr 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. Actual McHrs used is 47100. So OH applied is 47100*22.88 = $1,077,648 Thus OH were Underapplied by 1029600- $1,077,648 = -$48,048 C. Determine the predetermined overhead rate if the predetermined overhead rate is based on the amount of the allocation base at capacity. PreDetermined OH rate = Mfg OH/Est McHrs = 1029600/52000 = $19.80 per McHr 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. Actual McHrs used is 47100. So OH applied is 47100*19.80 = $932,580 Thus OH were Overapplied by 1029600- $932,580 = $97,020
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