The management of Aamot Corporation would like to investigate the possibility of
ID: 2489443 • Letter: T
Question
The management of Aamot 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 93,500 machine-hours. In addition, capacity is 100,000 machine-hours and the actual level of activity for the year is 93,100 machine-hours. All of the manufacturing overhead is fixed and is $8,434,635 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? (Round your intermediate calculations to 2 decimal places.)
A. 550,281 overapplied
B. 36,084 overapplied
C. 550,281 underapplied
D. 36,084 underapplied
Explanation / Answer
Answer:
Predetermined overhead rate = Estimated manufacturing overhead / Estimated amount of the allocation base
= $8,434,635 / 93,500 machine-hours = $90.21 per machine hour
Actual overhead applied = Predetermined rate * actual machine hours = 90.21 * 93,100 = $8,398,551.00
Overhead over-applied/(under-applied) = Actual overhead applied - Actual overhead incurred
= $8,398,551.00 - $8,434,635 = ($36,084) or $36,084 under-applied
D. 36,084 under-applied is correct.
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