Alderberry Recording Inc. is a small audio recording studio. The company handles work for advertising agencies-primarily for radio ads-and has a few singers and bands as clients. Alderberry Recording handles all aspects of recording, from editing to making a digital master. The competition in the audio recording industry has always been tough, but it has been getting even tougher over the last several years. The studio has been losing customers to newer studios that are equipped with more up-to-date equipment and are able to offer very attractive prices and excellent service. Summary data concerning the last two years of operations follow:

Required:
1. Alderberry Recording computes its predetermined overhead rate at the beginning of each year based on the estimated studio overhead and the estimated hours of studio service for the year. How much overhead would have been applied to the Fire job if it had been done in 20Xl? In 20X2? By how much would overhead have been underapplied or overapplied in 20Xl? In 20X2?
2. The president of Alderberry Recording has heard that some companies in the industry have changed to a system of computing the predetermined overhead rate at the beginning of each year based on the estimated studio overhead for the year and the hours of studio service that could be provided at capacity. He would like to know what effect this method would have on job costs. How much overhead would have been applied using this method to the Fire job if it had been done in 20Xl? In 20X2? By how much would overhead have been underapplied or overapplied in 20Xl using this method? In 20X2?
3. How would you interpret the underapplied or overapplied overhead that results from using studio- hours at capacity to compute the predetermined overhead rate?
4. What fundamental business problem is Alderberry Recording facing? Which method of computing the predetermined overhead rate is likely to be more helpful in facing this problem? Explain.

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Estimated hours of studio service... Estimated studio overhead cost.... Actual hours of studio service provided... Actual studio overhead cost incurred.. Hours of studio service at capacity..... 20X1 1,000 $90,000 900 $90,000 1,800 20X2 750 $90,000 600 $90,000 1,800