Predetermined overhead rate on the estimated amount


Question:

The management of Foy Corporation would like to investigate the possibility of basing its predetermined overhead rate on activity at capacity. The companyAc€?cs controller has provided an example to illustrate how this new system would work. In this example, the allocation basis is machine-hours and the estimated amount of the allocation base for the upcoming year is 86,000 machine-hours. In addition, capacity is 94,000 machine-hours and the actual level of activity for the year is 88,200 machine-hours. All of the manufacturing overhead is fixed and is $6,790,560 per year. For simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well as the manufacturing overhead at capacity. It is further assumed that this is also the actual amount of manufacturing overhead for the year.

If the company bases its predetermined overhead rate on the estimated amount of the allocation base for the upcoming year, by how much was manufacturing overhead underapplied or overapplied?

Choose from one of these answers below

A) $418,992 Underapplied
B) $173,712 Overapplied
C) $418,992 Overapplied
D) $173,712 Underapplied-

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Accounting Basics: Predetermined overhead rate on the estimated amount
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