Reference no: EM133143474

Question - Gina, an accounting manager at Sevilla Company, is developing the pre-determined overhead allocation rate for a new machine. The annual costs of the machine are a total of $20,000. This total includes operations and maintenance. The machine's total available time is 5,000 hours per year. The company expects to use this machine at its full capacity. However, the machine requires 500 hours of maintenance per year (and this 500 hours is part of the total available time of 5,000 hours).

Gina suggests that she should back out the 500 hours of maintenance before calculating the overhead rate, and use 4,500 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.

Required - Which of the following best addresses this scenario?

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

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

C) If Gina doesn't want the cost of maintenance to be charged to the products, she should not back out the 500 hours, and therefore use the full 5,000 hours as the denominator volume.

D) Regardless of what Gina does with the 500 hours, the overhead rate will be the same because the total cost is $20,000.