the management of digges corporation would like to investigate the possibility of basing its predetermined…

the management of digges corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. the corporations 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 51,000 machine - hours. in addition, capacity is 63,000 machine - hours and the actual level of activity for the year is 53,300 machine - hours. all of the manufacturing overhead is fixed and is $1,702,890 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 corporation bases its predetermined overhead rate on capacity, by how much was manufacturing overhead underapplied or overapplied?\na) $262,191 underapplied\nb) $76,797 underapplied\nc) $262,191 overapplied\nd) $76,797 overapplied

the management of digges corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. the corporations 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 51,000 machine - hours. in addition, capacity is 63,000 machine - hours and the actual level of activity for the year is 53,300 machine - hours. all of the manufacturing overhead is fixed and is $1,702,890 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 corporation bases its predetermined overhead rate on capacity, by how much was manufacturing overhead underapplied or overapplied?\na) $262,191 underapplied\nb) $76,797 underapplied\nc) $262,191 overapplied\nd) $76,797 overapplied

Answer

Explanation:

Step1: Calculate the predetermined overhead rate based on capacity

The formula for the predetermined overhead rate is ( \text{Predetermined Overhead Rate}=\frac{\text{Estimated Manufacturing Overhead}}{\text{Capacity}} ). Given that the estimated manufacturing overhead is ( $1,702,890 ) and capacity is ( 63,000 ) machine - hours. ( \text{Predetermined Overhead Rate}=\frac{1702890}{63000}=$27.03 ) per machine - hour.

Step2: Calculate the applied manufacturing overhead

The formula for applied manufacturing overhead is ( \text{Applied Manufacturing Overhead}=\text{Predetermined Overhead Rate}\times\text{Actual Activity} ). The actual activity is ( 53,300 ) machine - hours. ( \text{Applied Manufacturing Overhead}=27.03\times53300=$1,440,699 ).

Step3: Calculate the under - applied or over - applied manufacturing overhead

The formula is ( \text{Under/Over Applied}=\text{Actual Manufacturing Overhead}-\text{Applied Manufacturing Overhead} ). Since the actual manufacturing overhead is ( $1,702,890 ). ( \text{Under/Over Applied}=1702890 - 1440699=$262,191 ). Since ( 1702890>1440699 ), manufacturing overhead is under - applied.

Answer:

A. ( $262,191 ) underapplied