The management of Chaloux Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The Corporation's controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours. If the Corporation bases its predetermined overhead rate on capacity, by how much was manufacturing overhead underapplied or overapplied?
A)$9,792 Overapplied
B)$1,344 Overapplied
C)$9,792 Underapplied
D)$1,344 Underapplied

Question

The management of Chaloux Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The Corporation's controller has provided an example to illustrate how this new system would work. In this example, the allocation base is machine-hours.  If the Corporation bases its predetermined overhead rate on capacity, by how much was manufacturing overhead underapplied or overapplied?
A)$9,792 Overapplied 
B)$1,344 Overapplied 
C)$9,792 Underapplied 
D)$1,344 Underapplied

Quizplus · Accepted Answer

To calculate the predetermined overhead rate, first, we need to determine the expected overhead cost at capacity, which is $489,600 ($408,000 + $81,600).

Next, we divide the expected overhead cost by the expected activity level at capacity, which is 20,400 machine-hours ($489,600 / 20,400), resulting in a predetermined overhead rate of $24 per machine-hour.

Then, we multiply the predetermined overhead rate by the actual activity level, which is 19,600 machine-hours, to get the applied overhead cost of $470,400 (19,600 x $24).

Finally, we compare the applied overhead cost to the actual overhead cost incurred, which is $480,192, resulting in an underapplied overhead cost of $9,792 ($480,192 - $470,400). Therefore, the correct answer is C) $9,792 Underapplied.

The Management of Chaloux Corporation Would Like to Investigate the Possibility