The management of Royal 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 70,000 machine-hours. In addition, capacity is 82,000 machine-hours and the actual activity for the year is 72,900 machine-hours. All of the manufacturing overhead is fixed and is $4,132,800 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 and the actual amount of
manufacturing overhead for the year. Job 706H, which required 300 machine-hours, is one of the jobs worked on during the year.Required:a. Determine the predetermined overhead rate if the predetermined overhead rate is based on the amount of the allocation base at capacity.b. Determine how much overhead would be applied to Job 706H if the predetermined overhead rate is based on the amount of the allocation base at capacity.c. Determine the underapplied or overapplied overhead for the year if the predetermined overhead rate is based on the amount of the allocation base at capacity.
What will be an ideal response?
a.
| Calculation of the predetermined overhead rate: | |||
| Estimated total manufacturing overhead at capacity | $ | 4,132,800 | |
| Total amount of the allocation base at capacity | 82,000 | MHs | |
| Predetermined overhead rate | $ | 50.40 | per MH |
| Manufacturing overhead applied to Job 706H: | |||
| Number of hours for the job | 300 | MHs | |
| Predetermined overhead rate | $ | 50.40 | per MH |
| Manufacturing overhead applied to the job | $ | 15,120 |
| Calculation of overhead underapplied or overapplied: | |||
| Actual manufacturing overhead cost incurred | $ | 4,132,800 | |
| Manufacturing overhead applied to jobs: | |||
| Predetermined overhead rate | $ | 50.40 | per MH |
| Actual hours | 72,900 | MHs | |
| Manufacturing overhead applied to jobs | $ | 3,674,160 | |
| Underapplied (overapplied) manufacturing overhead | $ | 458,640 | Underapplied |
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