<u>Complete Question:</u>
Change the estimated total amount of the allocation base back to 65,000 machine-hours, so that the data area of you worksheet looks exactly the same as in Requirement 2. Now change the actual manufacturing overhead cost from $395,700 to $387,000. The data area of your worksheet should now look like this:
- Allocation base is Machine-hours
- Estimated manufacturing overhead cost $383,500
- Estimated total amount of the allocation base 65,000 machine-hours
- Actual manufacturing overhead cost $387,000
- Actual total amount of the allocation base 63,000 machine-hours
<u>Requirement:</u>
Why is the amount of underapplied (overapplied) manufacturing overhead different from Requirement 2 above?
A. The predetermined overhead rate changed.
B. The change in the actual manufacturing overhead cost directly resulted in a comparable change in the amount of underapplied (overapplied) manufacturing overhead.
C. The change in the estimated total amount of the allocation base affected the amount of manufacturing overhead applied.
Answer:
Option B. The change in the actual manufacturing overhead cost directly resulted in a comparable change in the amount of underapplied (overapplied) manufacturing overhead.
Option C. The change in the estimated total amount of the allocation base affected the amount of manufacturing overhead applied.
Explanation:
Option A is incorrect because predetermined Overhead Absorption Rate (OAR) never changes.
Option B is correct. Due to budgeted ($383,500) and actual Manufacturing overhead cost ($387,000) difference which clearly shows that the actual cost was higher than the budgeted manufacturing cost. This cost difference factor was one of the main reason of underapplied overhead cost. Furthermore, due to this difference the Actual Overhead Absorption Rate was higher and the Budgeted Overhead Absorption Rate that we were using for pricing and costing purpose was lower in value.
Option C. Due to the difference between budgeted (65,000 Hrs) and actual allocation Base (63,000 Hrs) which is machine hours in this case. The overhead absorbed on the basis of machine hours (63,000 Hrs) were lower than the budget set (65,000 Hrs). Allocation base is an appropriate basis which is use to assign overhead cost to each unit product, it can be units product, labor hours, machine hours, etc.
