Exam 18: The Predetermined Overhead Rate and Capacity

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.

Marder 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: Required: a.Calculate the predetermined overhead rate based on capacity. b.Calculate the manufacturing overhead applied. c.Determine the Gross Margin for the month. d.Calculate the cost of unused capacity.