Asked by Tabitha Mooney on Jul 02, 2024
The management of Kotek 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 8,000 machine-hours. In addition, capacity is 10,000 machine-hours and the actual activity for the year is 8,700 machine-hours. All of the manufacturing overhead is fixed and is $6,400 per year. Job L77S, which required 220 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 activity at capacity.b. Determine how much overhead would be applied to Job L77S if the predetermined overhead rate is based on activity at capacity.c. Determine the cost of unused capacity for the year if the predetermined overhead rate is based on activity at capacity.
Capacity
The maximum level of output that a company can sustain to produce in a given period under normal circumstances.
Machine-Hours
Machine-hours refer to the total time that machinery is in operation, often used as a basis for allocating manufacturing overhead costs.
Unused Capacity
The portion of a company's production capability or resources that is not currently being utilized to generate revenue or output.
- Become proficient in the methodology for estimating predetermined overhead rates using allocation bases such as machine-hours, labor-hours, and capacity.
- Master the concept of assessing the expense related to non-utilized capacity and how it alters the costing methodology.
- Acquire knowledge about the rationale for setting overhead rates based on the capacity of activities rather than on projected annual activities.
Learning Objectives
- Become proficient in the methodology for estimating predetermined overhead rates using allocation bases such as machine-hours, labor-hours, and capacity.
- Master the concept of assessing the expense related to non-utilized capacity and how it alters the costing methodology.
- Acquire knowledge about the rationale for setting overhead rates based on the capacity of activities rather than on projected annual activities.
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