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 69,000 machine-hours. Capacity is 82,000 machine-hours and the actual level of activity for the year is assumed to be 72,400 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 $4,130,340 per year. It is assumed that a number of jobs were worked on during the year, one of which was Job Q20L which required 470 machine-hours.

If the company bases its predetermined overhead rate on capacity, then the amount of manufacturing overhead charged to Job Q20L is closest to:

A: $26,812.98

B: $28,589.98

C: 23,673.90

D: 26,592.60

Answer 1

Company based its predetermined overhead rate on capacity.

Capacity of the company is 82,000 machine hours

Estimated total overhead is $4,130,340.

The following is the formula for calculating predetermined rate

Predetermined overhead rate = estimated total overhead / estimated allocation base

Predetermined overhead rate

= $4,130,340 / 82,000 = $50.37

470 machine hours are required by Job Q20L

Overhead charged to Job Q20L

    = 470 × 50.37 = $23,673.9

If the company bases its predetermined overhead rate on capacity, the amount of overhead charged to JobQ20L is $23,673.90.

Option C 23,673.90 is CORRECT.

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