(Appendix 3A)If the predetermined overhead rate is based on the estimated total amount of the allocation base at capacity,it is more likely that overhead will be underapplied than overapplied.

Question

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If the predetermined overhead rate is based on the estimated total amount of the allocation base at capacity, it assumes that the actual level of activity will be equal to the estimated level of activity, but in reality, it may differ. As a result, overhead may be underapplied when actual activity is less than estimated, resulting in a shortage of allocated overhead to absorbed product costs.

(Appendix 3A)If the Predetermined Overhead Rate Is Based on the Estimated