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1
Managerial Accounting, 16e (Garrison)
Appendix 2B The Predetermined Overhead Rate and Capacity
1) When the fixed costs of capacity are spread over the estimated activity of the period rather than
the level of activity at capacity, the units that are produced must shoulder the costs of unused
capacity.
2) When the predetermined overhead rate is based on the level of activity at capacity, an item
called the Cost of Unused Capacity may appear to be treated as a period expense on income
statements prepared for internal management use.
3) If the predetermined overhead rate is based on the estimated level of activity for the current
period, then products will be charged only for the capacity that they use and will not be charged for
the capacity they don't use.
4) Risser Woodworking Corporation produces fine cabinets. The company uses a job-order
costing system in which its predetermined overhead rate is based on capacity. The capacity of the
factory is determined by the capacity of its constraint, which is an automated jointer. Additional
information is provided below for the most recent month:
Estimates at the beginning of the month:
Estimated total fixed manufacturing overhead
$
14,256
Capacity of the jointer
240
hours
Actual results:
Sales
$
62,310
Direct materials
$
14,100
Direct labor
$
16,000
Actual total fixed manufacturing overhead
$
14,256
Selling and administrative expense
$
8,900
Actual hours of jointer use
220
hours
The gross margin that would be reported on the income statement prepared for internal
management purposes would be closest to:
A) $10,242
B) $19,142
C) $17,954
D) $62,310
5) The management of Garn Corporation would like to investigate the possibility of basing its
predetermined overhead rate on activity at capacity rather than on the estimated activity for the
coming year. The Corporation'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
activity for the upcoming year is 69,000 machine-hours. Capacity is 85,000 machine-hours. All of
the manufacturing overhead is fixed and is $4,105,500 per year within the range of 69,000 to
85,000 machine-hours. If the Corporation bases its predetermined overhead rate on capacity but
the actual level of activity for the year turns out to be 69,700 machine-hours, the cost of unused
capacity shown on the income statement prepared for internal management purposes would be
closest to:
A) $772,800
B) $780,640
C) $738,990
D) $41,650
6) The management of Krach 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 10,000
machine-hours. Capacity is 12,000 machine-hours and the actual level of activity for the year is
assumed to be 9,500 machine-hours. All of the manufacturing overhead is fixed and both the
estimated amount at the beginning of the year and the actual amount at the end of the year are
assumed to be $12,000 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, what would be the cost of
unused capacity reported on the income statement prepared for internal management purposes?
A) $2,000
B) $2,500
C) $1,900
D) $600
7) The management of Winterroth Corporation would like to investigate the possibility of basing
its predetermined overhead rate on activity at capacity. The Corporation's controller has provided
an example to illustrate how this new system would work. In this example, the allocation base is
machine-hours.
Estimated at the Beginning of
the Year
Capacity
Actual
Machine-hours
53,000
63,000
49,000
Manufacturing overhead
$
1,803,060
$
1,803,060
$
1,803,060
If the Corporation bases its predetermined overhead rate on capacity, then as shown on the income
statement prepared for internal management purposes, the cost of unused capacity would be
closest to:
A) $286,200
B) $400,680
C) $264,600
D) $136,080
8) Dowty Woodworking Corporation produces fine cabinets. The company uses a job-order
costing system in which its predetermined overhead rate is based on capacity. The capacity of the
factory is determined by the capacity of its constraint, which is an automated lathe. Additional
information is provided below for the most recent month:
Estimates at the beginning of the month:
Estimated total fixed manufacturing overhead
$
19,964
Capacity of the lathe
280
hours
Actual results:
Actual total fixed manufacturing overhead
$
19,964
Actual hours of lathe use
230
hours
The manufacturing overhead applied is closest to:
A) $19,964
B) $16,399
C) $7,639
D) $9,300
9) Rapier Woodworking Corporation produces fine cabinets. The company uses a job-order
costing system in which its predetermined overhead rate is based on capacity. The capacity of the
factory is determined by the capacity of its constraint, which is an automated jointer. Additional
information is provided below for the most recent month:
Estimates at the beginning of the month:
Estimated total fixed manufacturing overhead
$
3,740
Capacity of the jointer
200
hours
Actual results:
Actual total fixed manufacturing overhead
$
3,740
Actual hours of jointer use
170
hours
The predetermined overhead rate based on hours at capacity is closest to:
A) $58.24 per hour
B) $49.50 per hour
C) $22.00 per hour
D) $18.70 per hour
10) Traeger Woodworking Corporation produces fine cabinets. The company uses a job-order
costing system in which its predetermined overhead rate is based on capacity. The capacity of the
factory is determined by the capacity of its constraint, which is an automated bandsaw. Additional
information is provided below for the most recent month:
Estimates at the beginning of the month:
Estimated total fixed manufacturing overhead
$
26,936
Capacity of the bandsaw
280
hours
Actual results:
Actual total fixed manufacturing overhead
$
26,936
Actual hours of bandsaw use
260
hours
The cost of unused capacity that would be reported as a period expense on the income statement
prepared for internal management purposes would be closest to:
A) $1,924
B) $18,136
C) $0
D) $18,765
11) Mausser Woodworking Corporation produces fine cabinets. The company uses a job-order
costing system in which its predetermined overhead rate is based on capacity. The capacity of the
factory is determined by the capacity of its constraint, which is an automated jointer. Additional
information is provided below for the most recent month:
Estimates at the beginning of the month:
Estimated total fixed manufacturing overhead
$
11,648
Capacity of the jointer
280
hours
Actual results:
Sales
$
52,760
Direct materials
$
13,300
Direct labor
$
16,000
Actual total fixed manufacturing overhead
$
11,648
Selling and administrative expense
$
9,300
Actual hours of jointer use
260
hours
The cost of unused capacity that would be reported as a period expense on the income statement
prepared for internal management purposes would be closest to:
A) $0
B) $2,348
C) $832
D) $3,012
12) Mausser Woodworking Corporation produces fine cabinets. The company uses a job-order
costing system in which its predetermined overhead rate is based on capacity. The capacity of the
factory is determined by the capacity of its constraint, which is an automated jointer. Additional
information is provided below for the most recent month:
Estimates at the beginning of the month:
Estimated total fixed manufacturing overhead
$
11,648
Capacity of the jointer
280
hours
Actual results:
Sales
$
52,760
Direct materials
$
13,300
Direct labor
$
16,000
Actual total fixed manufacturing overhead
$
11,648
Selling and administrative expense
$
9,300
Actual hours of jointer use
260
hours
The gross margin that would be reported on the income statement prepared for internal
management purposes would be closest to:
A) $52,760
B) $3,344
C) $12,644
D) $11,812
13) Coble Woodworking Corporation produces fine cabinets. The company uses a job-order
costing system in which its predetermined overhead rate is based on capacity. The capacity of the
factory is determined by the capacity of its constraint, which is an automated shaper. Additional
information is provided below for the most recent month:
Estimates at the beginning of the month:
Estimated total fixed manufacturing overhead
$
33,075
Capacity of the shaper
270
hours
Actual results:
Sales
$
79,268
Direct materials
$
12,200
Direct labor
$
17,400
Actual total fixed manufacturing overhead
$
33,075
Selling and administrative expense
$
8,100
Actual hours of shaper use
250
hours
The predetermined overhead rate based on hours at capacity is closest to:
A) $30.00 per hour
B) $122.50 per hour
C) $32.40 per hour
D) $132.30 per hour
14) Coble Woodworking Corporation produces fine cabinets. The company uses a job-order
costing system in which its predetermined overhead rate is based on capacity. The capacity of the
factory is determined by the capacity of its constraint, which is an automated shaper. Additional
information is provided below for the most recent month:
Estimates at the beginning of the month:
Estimated total fixed manufacturing overhead
$
33,075
Capacity of the shaper
270
hours
Actual results:
Sales
$
79,268
Direct materials
$
12,200
Direct labor
$
17,400
Actual total fixed manufacturing overhead
$
33,075
Selling and administrative expense
$
8,100
Actual hours of shaper use
250
hours
The manufacturing overhead applied is closest to:
A) $7,500
B) $33,075
C) $8,100
D) $30,625
15) Coble Woodworking Corporation produces fine cabinets. The company uses a job-order
costing system in which its predetermined overhead rate is based on capacity. The capacity of the
factory is determined by the capacity of its constraint, which is an automated shaper. Additional
information is provided below for the most recent month:
Estimates at the beginning of the month:
Estimated total fixed manufacturing overhead
$
33,075
Capacity of the shaper
270
hours
Actual results:
Sales
$
79,268
Direct materials
$
12,200
Direct labor
$
17,400
Actual total fixed manufacturing overhead
$
33,075
Selling and administrative expense
$
8,100
Actual hours of shaper use
250
hours
The cost of unused capacity that would be reported as a period expense on the income statement
prepared for internal management purposes would be closest to:
A) $2,450
B) $0
C) $24,975
D) $25,575
16) Coble Woodworking Corporation produces fine cabinets. The company uses a job-order
costing system in which its predetermined overhead rate is based on capacity. The capacity of the
factory is determined by the capacity of its constraint, which is an automated shaper. Additional
information is provided below for the most recent month:
Estimates at the beginning of the month:
Estimated total fixed manufacturing overhead
$
33,075
Capacity of the shaper
270
hours
Actual results:
Sales
$
79,268
Direct materials
$
12,200
Direct labor
$
17,400
Actual total fixed manufacturing overhead
$
33,075
Selling and administrative expense
$
8,100
Actual hours of shaper use
250
hours
The gross margin that would be reported on the income statement prepared for internal
management purposes would be closest to:
A) $19,043
B) $16,593
C) $10,943
D) $79,268
17) Dunnings Woodworking Corporation produces fine cabinets. The company uses a job-order
costing system in which its predetermined overhead rate is based on capacity. The capacity of the
factory is determined by the capacity of its constraint, which is an automated router. Additional
information is provided below for the most recent month:
Estimates at the beginning of the month:
Estimated total fixed manufacturing overhead
$
10,998
Capacity of the router
180
hours
Actual results:
Actual total fixed manufacturing overhead
$
10,998
Actual hours of router use
130
hours
The predetermined overhead rate based on hours at capacity is closest to:
A) $84.60 per hour
B) $61.10 per hour
C) $61.54 per hour
D) $44.44 per hour
18) Dunnings Woodworking Corporation produces fine cabinets. The company uses a job-order
costing system in which its predetermined overhead rate is based on capacity. The capacity of the
factory is determined by the capacity of its constraint, which is an automated router. Additional
information is provided below for the most recent month:
Estimates at the beginning of the month:
Estimated total fixed manufacturing overhead
$
10,998
Capacity of the router
180
hours
Actual results:
Actual total fixed manufacturing overhead
$
10,998
Actual hours of router use
130
hours
The manufacturing overhead applied is closest to:
A) $7,943
B) $8,000
C) $5,778
D) $10,998
19) The management of Bullinger 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 9,000
machine-hours. Capacity is 12,000 machine-hours and the actual level of activity for the year is
assumed to be 7,700 machine-hours. All of the manufacturing overhead is fixed and both the
estimated amount at the beginning of the year and the actual amount at the end of the year are
assumed to be $11,880 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 the estimated amount of the allocation
base for the upcoming year, then the predetermined overhead rate is closest to:
A) $1.32 per machine-hour
B) $1.49 per machine-hour
C) $0.99 per machine-hour
D) $1.54 per machine-hour
