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 from which CDs can be copied. 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:

The company applies studio overhead to recording jobs on the basis of the hours of studio service provided. For example, 30 hours of studio time were required to record, edit, and master the Fire music CD for a local band. All of the studio overhead is fixed, and the actual overhead cost incurred was exactly as estimated at the beginning of the year in both 2013 and 2014.
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 2013? In 2014? By how much would overhead have been under-applied or over-applied in 2013? In 2014?
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 2013? In 2014?
By how much would overhead have been under-applied or over-applied in 2013 using this method? In 2014?
3. How would you interpret the under-applied or over-applied 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.