Question

3.) The management of Grainger Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity rather than on the estimated amount of activity for the year. Using the capacity level of activity as the base normally results in underapplied overhead. This amount could then be used to approximate the cost of idle resources (sometimes referred to as excess capacity). Of course, in order to comply with GAAP, the balance in the manufacturing overhead account would have to be assigned to products using an adjusting entry when the books are closed at the end of the accounting period. 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 49,000 machine-hours. However, the engineering department estimates the (maximum) capacity is 54,000 machine-hours. The actual activity for the year is 46,900 machine-hours. All of the manufacturing overhead is fixed and is estimated at $1,323,000 per year. For simplicity, it is assumed that this amount is the actual overhead for the year as well as the manufacturing overhead at full capacity Job SUA-600, which required 45 machine-hours, is one of the jobs worked on during the year.

3.) QUESTION: Determine the underapplied overhead for the year if the predetermined overhead rate is based on the amount of the allocation base at (maximum) capacity. (Round to the nearest dollar.)

4.) QUESTION: Determine the amount of underapplied overhead for the year if the predetermined overhead rate is based on the estimated amount of the allocation base. Ignore the sign of your answer. (Round to the nearest dollar.)

Answer 1

3) Predetermined overhead rate= Estimated overhead costs/Estimated (maximum) capacity

= $1323000/54000

= $24.5 per MH

Manufacturing overhead applied= Predetermined overhead rate*Actual machine hours

= $24.5*46900= $1149050

Underapplied or overapplied overhead= Actual manufacturing overhead-Manufacturing overhead applied

= $1323000-1149050= $173950 underapplied

4) Predetermined overhead rate= Estimated overhead costs/Estimated amount of the allocation base

= $1323000/49000= $27 per MH

Manufacturing overhead applied= Predetermined overhead rate*Actual machine hours

= $27*46900= $1266300

Underapplied or overapplied overhead= Actual manufacturing overhead-Manufacturing overhead applied

= $1323000-1266300= $56700 underapplied