Question

The management of Plitt 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 78,000 machine hours. Capacity is 101.000 machine-hours and the actual level of activity for the year is assumed to be 80,500 machine-hours. All of the manufacturing overhead is fixed and both the estimated amount at the beginning of the year and the actual amount at the end of the year are assumed to be $4,726,800 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Q20L which required 370 machine-hours. If the company bases its predetermined overhead rate on the estimated amount of the allocation base for the upcoming year, then the predetermined overhead rate is closest to:

Answer 1

1. Computation of Company’s Predetermined overhead rate:-
	Predetermined overhead rate	=	Estimated total fixed manufacturing overhead	=	$4,726,800	=	$60.60	per machine hour
			Estimated total amount of allocation base		78000
2. Computation of Company’s Predetermined overhead rate:-
	Predetermined overhead rate	=	Estimated total fixed manufacturing overhead	=	$3,660	=	$18.30	per hour
			Total capacity in hours		200
3. Computation of Company’s Predetermined overhead rate:-
	Predetermined overhead rate	=	Estimated total fixed manufacturing overhead	=	$34,840	=	$1.34	per machine hour
			Estimated total amount of allocation base		26000
4. Computation of Cost of Unused Capacity to be reported as period expense:-
Computation of Company’s Predetermined overhead rate:-
	Predetermined overhead rate	=	Estimated total fixed manufacturing overhead	=	$66,780	=	$159.00	per hour
			Total capacity in hours		420
a	Capacity of shaper	=	420	hours
b	Actual hours of shaper use	=	370	hours
c	Unused Capacity (a-b)	=	50	hours
d	Predetermined overhead rate	=	$159.00	per hour
e	Cost of Unused Capacity to be reported as period expense (c*d)	=	$7,950
5. Computation of Cost of Unused Capacity to be reported as period expense:-
Computation of Company’s Predetermined overhead rate:-
	Predetermined overhead rate	=	Estimated total fixed manufacturing overhead	=	$47,100	=	$157.00	per hour
			Total capacity in hours		300
a	Capacity of shaper	=	300	hours
b	Actual hours of shaper use	=	260	hours
c	Unused Capacity (a-b)	=	40	hours
d	Predetermined overhead rate	=	$157.00	per hour
e	Cost of Unused Capacity to be reported as period expense (c*d)	=	$6,280
6. Computation of Company’s Predetermined overhead rate:-
	Predetermined overhead rate	=	Estimated total fixed manufacturing overhead	=	$2,838,150	=	$35.70	per machine hour
			Total capacity in machine hours		79500
7. Computation of Cost of Unused Capacity to be reported as period expense:-
Computation of Company’s Predetermined overhead rate:-
	Predetermined overhead rate	=	Estimated total fixed manufacturing overhead	=	$1,869,120	=	$18.88	per machine hour
			Total capacity in machine hours		99000
a	Total capacity in machine hours	=	99000	hours
b	Actual hours used	=	78000	hours
c	Unused Capacity (a-b)	=	21000	hours
d	Predetermined overhead rate	=	$18.88	per machine hour
e	Cost of Unused Capacity to be reported as period expense (c*d)	=	$396,480

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