The management of Chaloux 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. If the company bases its predetermined overhead rate on capacity, by how much was manufacturing overhead underapplied or overapplied?

Question

The management of Chaloux 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.  If the company bases its predetermined overhead rate on capacity, by how much was manufacturing overhead underapplied or overapplied?

Quizplus · Accepted Answer

Under the new system, the predetermined overhead rate is calculated as follows:

Predetermined overhead rate = Estimated total manufacturing overhead costs at capacity / Estimated total capacity 
= $1,472,000 / 32,000 machine-hours 
= $46 per machine-hour

Using this rate, the total overhead cost applied to production is:

Total machine-hours used in production * Predetermined overhead rate
= 29,600 machine-hours * $46 per machine-hour 
= $1,361,600

However, actual overhead costs incurred during the year were $1,371,392. This means that there was an underapplication of overhead:

Actual overhead costs incurred - Overhead applied to production 
= $1,371,392 - $1,361,600 
= $9,792 underapplied.

Therefore, the correct answer is C) $9,792 Underapplied.

The Management of Chaloux Corporation Would Like to Investigate the Possibility