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

1. Assume that the over/underapplied overhead above is NOT considered material, prepare the adjusting journal entry to dispose of the variance at the end of the year.WHY must the company dispose of this variance?

1. By handling the misapplied overhead in this way, we are making an important assumption. What assumption are we making about the jobs worked on during the period?

1. What was the total manufacturing cost per unit produced using (a) actual costing and (b) normal costing?

1. One of the jobs worked on during the year was Alpha, which was started in January and completed in mid-December. Alpha required prime costs of $150,000, 13,200 machine hours and 1,600 direct labor hours. What would the job costs of Alpha be using a) actual costing based on direct labor hours and b) normal costing based on direct labor hours?

1. Four measures of activity level for applying overhead were mentioned above. Briefly explain each of these.What effect would the choice of this driver have on the amount of overhead applied?

1. If the company wants to minimize the amount of over/underapplied overhead, which of the possible activity bases would accomplish this? WHY? What would be the DISADVANTAGE of using this method?What do you think GAAP says on this?Do you think the IRS would care?

ASSUME that direct labor hours are a proper driver for the company and that the vast majority of the overhead is FIXED in nature. Does it sound like the company is effectively utilizing their fixed costs, yes or no and WHY? What dollar amount of fixed overhead, if any, is unutilized