Managerial Accounting Chapter 3A Overhead Rates

Managerial Accounting
Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
Chapter – 3 Appendix A
The Predetermined Overhead Rate and Capacity

Chapter 03 Appendix A: the predetermined overhead rate and capacity
Appendix 3AThe Predetermined Overhead Rate and Capacity
True / False Questions
1. If predetermined overhead rates are based on budgeted activity and overhead includes
significant fixed costs, then the unit product costs will fluctuate depending on the budgeted
level of activity for the period.
TRUE
AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Knowledge
Learning Objective: 03-08 (Appendix 3A) Understand the implications of basing the predetermined overhead rate on activity at capacity
rather than on estimated activity for the period
Level: Easy
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2. When the fixed costs of capacity are spread over the level of activity at capacity rather than
the estimated activity for the period, the units that are produced must shoulder the costs of
unused capacity.
FALSE
AACSB: Reflective Thinking

Bloom's: Comprehension
Level: Medium
Multiple Choice Questions
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3. The management of Chaloux 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.
If the company bases its predetermined overhead rate on capacity, by how much was
manufacturing overhead underapplied or overapplied?
A. $9,792 Overapplied
B. $1,344 Overapplied
C. $9,792 Underapplied
D. $1,344 Underapplied
Predetermined overhead rate = Estimated total manufacturing overhead at capacity

÷Estimated total amount of the allocation base at capacity = $57,120 ÷ 21,000 machine-hours
= $2.72 per machine-hour
AACSB: Analytic
Bloom's: Application
Level: Medium
3/24
4. The management of Griswell 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
39,000 machine-hours. In addition, capacity is 45,000 machine-hours and the actual level of
activity for the year is 40,200 machine-hours. All of the manufacturing overhead is fixed and
is $702,000 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 capacity, by how much was manufacturing overhead
underapplied or overapplied?

÷Estimated total amount of the allocation base at capacity = $702,000 ÷ 45,000 machine-
hours = $15.60 per machine-hour
AACSB: Analytic
Level: Medium
4/24
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
is $7,176,960 per year. For simplicity, it is assumed that this is the estimated manufacturing
that this is also the actual amount of manufacturing overhead for the year.
5. If the company bases its predetermined overhead rate on the estimated amount of the
allocation base for the upcoming year, the predetermined overhead rate is closest to:
A. $81.00
B. $79.66
C. $74.76
D. $80.64
Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total

amount of the allocation base = $7,176,960 ÷ 89,000 machine-hours = $80.64 per machine-
hour
AACSB: Analytic
Level: Medium
5/24
allocation base for the upcoming year, by how much was manufacturing overhead
A. $32,256 Underapplied
B. $553,224 Underapplied
C. $553,224 Overapplied
D. $32,256 Overapplied
AACSB: Analytic
Level: Medium
7. If the company bases its predetermined overhead rate on capacity, the predetermined
overhead rate is closest to:
A. $74.76
B. $81.00
C. $80.64
D. $79.66

÷Estimated total amount of the allocation base at capacity = $7,176,960 ÷ 96,000 machine-
AACSB: Analytic
Level: Medium
6/24
8. If the company bases its predetermined overhead rate on capacity, by how much was
AACSB: Analytic
Level: Medium
The management of Daguio Corporation would like to investigate the possibility of basing its
7/24
A. $36.98
B. $29.70
C. $35.30
D. $34.65

AACSB: Analytic
Level: Medium
AACSB: Analytic
Level: Medium
8/24
The management of Foy Corporation would like to investigate the possibility of basing its

amount of the allocation base = $6,790,560 ÷ 86,000 machine-hours = $78.96 per machine-
hour
AACSB: Analytic
Level: Medium
9/24

AACSB: Analytic
Level: Medium
The management of Bellon Corporation would like to investigate the possibility of basing its
is $142,830 per year. For simplicity, it is assumed that this is the estimated manufacturing
that this is also the actual amount of manufacturing overhead for the year. A number of jobs
were worked on during the year, one of which was Job P50E. This job required 160 machine-
hours.
10/24
allocation base for the upcoming year, the predetermined overhead rate is closest to:
A. $6.13
B. $6.43
C. $5.29
D. $6.21

amount of the allocation base = $142,830 ÷ 23,000 machine-hours = $6.21 per machine-hour
AACSB: Analytic
Level: Medium
allocation base for the upcoming year the amount of manufacturing overhead charged to the
Job P50E is closest to:
A. $846.40
B. $980.81
C. $993.60
D. $1,029.41
Manufacturing overhead applied = Predetermined overhead rate × Actual amount of the

allocation base
= $6.21 per machine-hour × 160 machine-hours = $993.60
AACSB: Analytic
Level: Medium
11/24
AACSB: Analytic
Level: Medium
A. $6.43
B. $5.29
C. $6.13
D. $6.21

AACSB: Analytic
Level: Medium
12/24
17. If the company bases its predetermined overhead rate on capacity, the amount of
manufacturing overhead charged to the job P50E is closest to:
A. $1,029.41
B. $993.60
C. $846.40
D. $980.81

Manufacturing overhead applied = Predetermined overhead rate × Actual amount of the
allocation base
= $5.29 per machine-hour × 160 machine-hours = $846.40
AACSB: Analytic
Level: Medium
13/24

AACSB: Analytic
Level: Medium
The management of Bow Corporation would like to investigate the possibility of basing its
that this is also the actual amount of manufacturing overhead for the year. A number of jobs
were worked on during the year, one of which was Job E82X. This job required 100 machine-
hours.
14/24
A. $41.92
B. $31.32
C. $39.44
D. $40.11

AACSB: Analytic
Level: Medium
20. If the company bases its predetermined overhead rate on capacity, the amount of
manufacturing overhead charged to the job E82X is closest to:
A. $4,010.85
B. $3,672.00
C. $3,132.00
D. $4,192.44

AACSB: Analytic
Level: Medium
15/24

AACSB: Analytic
Level: Medium
Essay Questions
16/24
22. The management of Svatek 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 16,000 machine-hours. In
addition, capacity is 20,000 machine-hours and the actual activity for the year is 17,800
machine-hours. All of the manufacturing overhead is fixed and is $51,200 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.
Required:
Determine the underapplied or overapplied manufacturing overhead for the year if the
predetermined overhead rate is based on the amount of the allocation base at capacity.

÷Estimated total amount of the allocation base at capacity = $51,200 ÷ 20,000 MHs = $2.56
per MH
AACSB: Analytic
Level: Medium
17/24
23. The management of Rainha Corporation would like to investigate the possibility of basing
for 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 the underapplied or overapplied manufacturing overhead for the year if the
a. Predetermined overhead rate = Estimated total manufacturing overhead at capacity

per MH
b.
AACSB: Analytic
Level: Medium
18/24
24. The management of Scurlock 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 19,000
machine-hours. In addition, capacity is 21,000 machine-hours and the actual activity for the
year is 18,200 machine-hours. All of the manufacturing overhead is fixed and is $71,820 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.
Required:
the estimated amount of the allocation base.
predetermined overhead rate is based on the estimated amount of the allocation base.
c. Determine the predetermined overhead rate if the predetermined overhead rate is based on
d. Determine the underapplied or overapplied manufacturing overhead for the year if the
a. Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total

amount of the allocation base = $71,820 ÷ 19,000 MHs = $3.78 per MH
b.
c. Predetermined overhead rate = Estimated total manufacturing overhead at capacity

per MH
d.
19/24
AACSB: Analytic
Level: Medium
20/24
25. The management of Gruwell Corporation would like to investigate the possibility of
year is 47,700 machine-hours. All of the manufacturing overhead is fixed and is $1,144,800
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 J42O, which required 40 machine-hours, is one of
the jobs worked on during the year.
Required:
the estimated amount of the allocation base.
b. Determine how much overhead would be applied to Job J42O if the predetermined
overhead rate is based on estimated amount of the allocation base.
c. Determine the underapplied or overapplied manufacturing overhead for the year if the
d. Determine the predetermined overhead rate if the predetermined overhead rate is based on
e. Determine how much overhead would be applied to Job J42O if the predetermined
overhead rate is based on the amount of the allocation base at capacity.
f. Determine the underapplied or overapplied manufacturing overhead for the year if the
21/24

amount of the allocation base = $1,144,800 ÷ 48,000 MHs = $23.85 per MH
b.
c.
d. Predetermined overhead rate = Estimated total manufacturing overhead at capacity

÷Estimated total amount of the allocation base at capacity = $1,144,800 ÷ 53,000 MHs =
$21.60 per MH
e.
f.
AACSB: Analytic
Level: Medium
22/24
26. The management of Niemeyer Corporation would like to investigate the possibility of
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 O65A, which required 300 machine-hours, is one of
the jobs worked on during the year.
Required:
b. Determine how much overhead would be applied to Job O65A if the predetermined
overhead rate is based on the amount of the allocation base at capacity.
c. Determine the underapplied or overapplied manufacturing overhead for the year if the
a. Predetermined overhead rate = Estimated total manufacturing overhead at capacity

÷Estimated total amount of the allocation base at capacity = $4,132,800 ÷ 82,000 MHs =
$50.40 per MH
b.
c.
AACSB: Analytic
Level: Medium
23/24
27. The management of Trew Corporation would like to investigate the possibility of basing
for the year.
Required:
a. Determine the underapplied or overapplied manufacturing overhead for the year if the

amount of the allocation base = $697,820 ÷ 37,000 MHs = $18.86 per MH
b. Predetermined overhead rate = Estimated total manufacturing overhead at capacity

÷Estimated total amount of the allocation base at capacity = $697,820 ÷ 46,000 MHs =
$15.17 per MH
AACSB: Analytic
Level: Medium
24/24

Managerial Accounting Chapter 3A Overhead Rates

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Managerial Accounting

Ray H. Garrison, Eric W. Noreen, Peter C. Brewer

The Predetermined Overhead Rate and Capacity

Appendix 3AThe Predetermined Overhead Rate and Capacity

True / False Questions

AACSB: Reflective Thinking

AACSB: Reflective Thinking

Multiple Choice Questions

Predetermined overhead rate = Estimated total manufacturing overhead at capacity

Predetermined overhead rate = Estimated total manufacturing overhead at capacity

Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total

Predetermined overhead rate = Estimated total manufacturing overhead at capacity

Predetermined overhead rate = Estimated total manufacturing overhead at capacity

Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total

Predetermined overhead rate = Estimated total manufacturing overhead at capacity

Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total

Manufacturing overhead applied = Predetermined overhead rate × Actual amount of the

Predetermined overhead rate = Estimated total manufacturing overhead at capacity

Predetermined overhead rate = Estimated total manufacturing overhead at capacity

Predetermined overhead rate = Estimated total manufacturing overhead at capacity

Predetermined overhead rate = Estimated total manufacturing overhead at capacity

Predetermined overhead rate = Estimated total manufacturing overhead at capacity

Predetermined overhead rate = Estimated total manufacturing overhead at capacity

Predetermined overhead rate = Estimated total manufacturing overhead at capacity

a. Predetermined overhead rate = Estimated total manufacturing overhead at capacity

a. Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total

c. Predetermined overhead rate = Estimated total manufacturing overhead at capacity

a. Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total

d. Predetermined overhead rate = Estimated total manufacturing overhead at capacity

a. Predetermined overhead rate = Estimated total manufacturing overhead at capacity

a. Predetermined overhead rate = Estimated total manufacturing overhead ÷ Estimated total

b. Predetermined overhead rate = Estimated total manufacturing overhead at capacity

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