Note on plant capacity and MO rates

Note on plant capacity and MO rates - How the...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
How the Pre-determined Overhead Rate is Affected by the Choice of the Allocation Base Units If a company uses the expected level of activity for its estimate of the allocation base units in determining the MO rate at the beginning of the year, then the MO rate will fluctuate from year to year. In a high volume year, the rate will be lower and in a low volume year, the rate will be higher. Example: MO rate, year 1 = $180,000 = $3.00 per DLH 60,000 DLH’s MO rate, year 2 = $180,000 = $6.00 per DLH 30,000 DLH’s When output falls in year 2, the units become more expensive to make and the business will be tempted to raise prices to cover the added cost. This would be very detrimental during a business downturn when demand and output have fallen. As an alternative, some businesses use plant capacity rather than expected level of activity. Plant capacity is usually a much higher level of output than expected level. This makes the MO rate generally lower.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/03/2012 for the course ACCT 2460 taught by Professor Farrar during the Winter '12 term at Conestoga.

Page1 / 2

Note on plant capacity and MO rates - How the...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online