Sharrar Corporation

The management of Sharrar 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 45,000 machine-hours. In addition, capacity is 52,000 machine-hours and the actual activity for the year is 47,100 machine-hours. All of the manufacturing overhead is fixed and is $1,029,600 per year. For simplicity, its 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.

A) Determine the underapplied or overapplied overhead for the year if the pretermined overhead rate is based on the estimated amount of the allocation base.

b) Determine the underapplied or overapplied overhead for the year if the predetermined overhead rate is based on the amount of the allocation base capacity.