Effects of Choice of Denominator (SIA, adapted) In setting up the annual the factory budget at the Talisman Company, the production manager and the sales manager spent much time discussing the volume level. As a result, the factory manager prepared two estimates of factory overhead:

VOLUME TOTAL FACTORY OVERHEAD 150,000 units $540,000 170,000 units $564,000 At the last moment however, the sales manager obtained another order, which prompted management to set the predetermined overhead rate per unit at the 180,000-unit level; this rate was applied during the year.

During the latter part of the year sales dropped unexpectedly. Production was reduced immediately; however, 60,000 units of the annual production remained unsold in finished-goods inventory. Actual overhead amounted to $560,000. When the overhead variances were being analyzed, an unfavorable denominator variance of $40,000 was determined.

Calculate the predetermined overhead rate used during the year and compute the over- (under-) application of overhead at year-end.

_ The company writes off overhead variances to cost of goods sold. What would have been the effect on the annual income statement and the year-end balance sheet, had the company used the actual overhead rate (as discovered at yearend), throughout the year, instead of the predetermined rate?