EXERCISE 3-13 (CONTINUED)

4. When overhead is applied using a predetermined rate based on ma-

chine-hours, it is assumed that overhead cost is proportional to ma-

chine-hours. So when the actual machine-hours turn out to be 75,000,

the costing system assumes that the overhead will be 75,000 machine-

hours × $2.40 per machine-hour, or $180,000. This is a drop of $12,000

from the initial estimated manufacturing overhead cost of $192,000.

However, the actual manufacturing overhead did not drop by this much.

The actual manufacturing overhead was $184,000—a drop of $8,000

from the estimate. The manufacturing overhead did not decline by the

full $12,000 because of the existence of fixed costs and/or because

overhead spending was not under control. These issues will be covered

in more detail in later chapters.