Problem:
The management of Keeter 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 97,100 machine-hours. In addition, capacity is 101,000 machine-hours and the actual level of activity for the year is 96,300 machine-hours. All of the manufacturing overhead is fixed and is $9,086,618 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.
Required:
Question: If the company bases its predetermined overhead rate on capacity, the predetermined overhead rate is:
- $93.58
- $92.60
- $94.36
- $89.97
Note: Be sure to show how you arrived at your answer.