Reference no: EM133044430

Question - Michelle, an accounting manager at Cabo Products, is developing the pre-determined overhead allocation rate for a new machine.

The annual costs of the machine are a total of $15,000. This total includes operations and maintenance.

The machine's total available time is 6,000 hours per year. The company expects to use this machine at its full capacity.

However, the machine requires 600 hours of maintenance per year (and this 600 hours is part of the total available time).

Michelle suggests that she should back out the 600 hours of maintenance before calculating the overhead rate, and use 5,400 hours as the denominator volume. Her reasoning is that she does not want to charge the products (i.e., that require the use of this machine) the maintenance portion of the costs.

Which of the following best addresses this scenario?

Backing out the hours will ensure that the cost of maintenance will not be applied to the products that use the machine.

Michelle does not have a choice regarding what denominator volume to use to calculate the predetermined overhead rate.

If Michelle doesn't want the cost of maintenance to be charged to the products, she should not back out the 600 hours, and therefore use the full 6,000 hours as the denominator volume.