Beta Company uses a predetermined overhead rate based on machine hours to allocate manufacturing overhead to jobs. The company estimated that it would incur $600,300 of manufacturing overhead during the year and that 250,100 machine hours would be used. During the year, the company actually incurred manufacturing overhead costs of $582,400 and 240,200 machine hours were used. By how much was manufacturing overhead overallocated or underallocated for the year? (Round intermediary calculations to the nearest cent and the final answer to the nearest dollar.)

Question

Quizplus · Accepted Answer

The predetermined overhead rate is calculated as follows:

$600,300 / 250,100 machine hours = $2.40 per machine hour

The actual overhead rate incurred during the year was:

$582,400 / 240,200 machine hours = $2.42 per machine hour

To determine if manufacturing overhead was overallocated or underallocated, we need to compare the actual overhead rate incurred to the predetermined overhead rate.

If the actual overhead rate is greater than the predetermined overhead rate, then manufacturing overhead is underallocated (meaning we did not allocate enough overhead to jobs during the year).

If the actual overhead rate is less than the predetermined overhead rate, then manufacturing overhead is overallocated (meaning we allocated too much overhead to jobs during the year).

In this case, the actual overhead rate ($2.42) is greater than the predetermined overhead rate ($2.40), so manufacturing overhead is underallocated.

To calculate the amount of underallocation:

Actual overhead incurred - (Predetermined overhead rate x Actual machine hours) = Underallocated manufacturing overhead

$582,400 - ($2.40 x 240,200) = $5,920 underallocated

Therefore, the answer is B.

Beta Company Uses a Predetermined Overhead Rate Based on Machine