Manufacturing Overhead Managerial Accounting Question

Question

Atlanta Inc. applies manufacturing overhead based on machine hours. The following information is available at the end of the period:

Machine Hours Available at Capacity : 79,000

Machine Hours Estimated For the Period : 68,000

Machine Hours Actually Incurred During the Period : 63,500

Estimated Manufacturing Overhead : $3,384,360

Actual Manufacturing Overhead : $3,642,690

 

If Atlanta bases its predetermined overhead rate on activity at capacity, how much lower will its applied manufacturing overhead be versus traditional GAAP Method?

A) 664,020 B) 714,705 C) 473,645 D) 440,055 E) None

Answer was D) but I need help with steps as to how.

Answer 1

First we need to calculate the M.Hours absorption rate at capacity and Estimated levels:

At Capacity level = $3,384,360 Est'd MFG overhead/79,000 Capacity hours= $42.84

At Estimated M. hours for the period= $3,384,360/68,000 Est'd M.hours for the period= $49.77

1) Using the Est'd M. hours rate for the period, the applied MFG OH would have been 63.500 actual M.hours X

    $49.77=$3,160,395.

2) If Atlanta Inc. used predetermined Overhead rate based on Capacity level the total applied MFG OH would have been

    63,500 actual machine hours X$42.84= $2,720,340.

To arrive at the under-applied MFG OH value subtract 1-2= $3,160,395- $2,720,340=$440,055 , answer D) above.