Hoyt Company uses a plantwide cost driver rate with machine hours as the cost driver. At the beginning of last year, Hoyt Company estimated its capacity-related (overhead) costs as $15,000,000 for a practical capacity of 100,000 machine hours per year. During the year, actual overhead costs were $14,200,000 and production required 90,000 machine hours.

Required

(a) Determine Hoyt Company’s plantwide cost driver rate and calculate the overhead cost applied to production last year.

(b) Suppose the company charges the difference between actual and applied overhead costs to cost of goods sold at the end of the year. Calculate the difference and state whether the result will be an increase or decrease in the previously recorded cost of goods sold.

(c) Suppose now that the company prorates the difference between actual and applied overhead costs to work in process, finished goods, and cost of goods sold. If the proportions of applied indirect cost in the ending balances of these accounts this period are 20% in ending work in process, 45% in finished goods inventory, and 35% in cost of goods sold, by how much will the three accounts be increased or decreased from their previously recorded amounts?

(d) Now suppose that the company wishes to decompose the difference between actual and applied overhead costs to gain further insight into the difference. Compute the difference between actual and estimated overhead cost and the difference between estimated overhead cost and applied overhead cost.

(e) What insight does management gain from the approach in part d as compared to the approaches in parts b and c?