ARIZONA CORPORATION

manufactures custom widgets and uses a normal costing system.The following information is available for the most recent year, 2016:

BudgetedActualOverhead$780,000$800,000Machine hours137,000150,000Direct labor hours15,00018,000Prime cost$3,500,000Number of units453,000500,000

The company has chosen direct labor hours as the overhead cost driver.Although 15,000 direct labor hours were budgeted (expected) for the year, the factory has the capacity of 25,000 direct labor hours under perfect operating conditions. Under normal conditions, however, a practical capacity of only 20,000 direct labor hours and 167,000 machine hours can be attained. The company has chosen to use the practical capacity as their denominator activity rate for normalizing overhead.

REQUIRED:

1. What is actual costing? What is the actual overhead rate?

1. WHY does overhead need to be allocated?

1. What is normal costing? How does it differ from actual costing? WHY would a company use normal costing versus actual costing? What does normal costing allow us to do that actual costing does not?

1. Are there any disadvantages to using normal costing?

1. Compute the predetermined overhead rate?

1. What was the applied (allocated) overhead for the year? Whats the journal entry for this?

1. What is the over/underapplied overhead for the year?