The management of YWZ Corporation would like to investigate the possibility of b
ID: 2541630 • Letter: T
Question
The management of YWZ 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.
Estimated activity for the upcoming year
76,000
machine-hours
Capacity
94,000
machine-hours
Actual activity for the year
82,800
machine-hours
Manufacturing overhead (all fixed)
$
5,572,320
per year
Job Q58A, which required 130 machine-hours, is one of the jobs worked on during the year.
Determine the cost of unused capacity for the year if the predetermined overhead rate is based on activity at capacity.
Estimated activity for the upcoming year
76,000
machine-hours
Capacity
94,000
machine-hours
Actual activity for the year
82,800
machine-hours
Manufacturing overhead (all fixed)
$
5,572,320
per year
Explanation / Answer
Predetermined overhead rate based on capacity=Total Manufacturing overhead/ Estimated total hours in the allocation base at capacity
=$5572320/94000 hours
=$59.28/Machine hour
Unused capacity=94000-82800=11200
So cost of unused capacity for the year =11200*$59.28=$663936
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