Read the following scenario and prepare a $1-2$ page memo responding at a minimum to the five questions detailed at the end.

Great Heart Clinic is a medical service institute that provides various services for its patients. The doctors working for the institute are required to fill out a note in the medical system for each patient treated. The system then generates a unique bill for each patient according to the pricing for the specific service or treatment received. Included in each patient$$s bill is the applied overhead cost based on direct labor hours. The clinic created the following overhead budget for this year, but the actual overhead was $$296,047.$

Great Heart Clinic Budget

Budget

Direct labor hours $10,000$

Overhead costs:

Indirect material $$3,500$

Indirect labor $$45,000$

Utilities $$6,000$

Insurance $$78,000$

Property taxes $$30,000$

Total $$162,500$

During this year, the doctors actually charged a total of $12,190$ hours as shown below.

Doctors Hours Charged

Doctor A $2,000$

Doctor B $1,850$

Doctor C $1,960$

Doctor D $2,100$

Doctor E $2,500$

Doctor F $1,780$

Total $12,190$

The overhead variance is deemed material by the CEO, and he wonders why this variance happened and how to address this variance. The CEO is also considering implementing an activity$-$based costing $($ABC$)$ system.

Question $1$: Explain whether the clinic should use a job costing system or a process costing system.

Question $2$: Calculate the applied overhead and identify if it is over or under applied. Show your calculations.

Question $3$: Identify and explain two shortcomings of using predetermined overhead rates to apply overhead.

Question $4$: Identify and explain why there is usually a difference between the applied overhead and the actual overhead.

Question $5$: Identify and explain the appropriate accounting treatment of this under or over applied overhead amount.