The management of Bellon 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 23,000 machine-hours. In addition, capacity is 27,000 machine-hours and the actual level of activity for the year is 23,300 machine-hours. All of the manufacturing overhead is fixed and is $142,830 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. A number of jobs were worked on during the year, one of which was Job P50E. This job required 160 machine-hours.
-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?
A)$1,863 Overapplied
B)$1,863 Underapplied
C)$19,573 Underapplied
D)$19,573 Overapplied

Question

Quizplus · Accepted Answer

Manufacturing overhead is underapplied when actual overhead costs exceed applied overhead costs. In this case, actual overhead costs were $21,436 and applied overhead costs were $19,573, so manufacturing overhead was underapplied by $1,863.

The Management of Bellon Corporation Would Like to Investigate the Possibility