The management of Bouyer 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. 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 34,000 machine-hours. In addition, capacity is 37,000 machine-hours and the actual activity for the year is 34,700 machine-hours. All of the manufacturing overhead is fixed and is $377,400 per year. Required:Determine the cost of unused capacity for the year if the predetermined overhead rate is based on activity at capacity.
What will be an ideal response?
Predetermined overhead rate = Estimated total manufacturing overhead at capacity ÷ Estimated total amount of the allocation base at capacity = $377,400 ÷ 37,000 MHs = $10.20 per MH
| Actual manufacturing overhead cost incurred | $ | 377,400 | |
| Manufacturing overhead applied to jobs: | |||
| Predetermined overhead rate | $ | 10.20 | per MH |
| Actual hours | 34,700 | MHs | |
| Manufacturing overhead applied to jobs | $ | 353,940 | |
| Cost of unused capacity | $ | 23,460 |
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