Requirement 5: What appears to be the major disadvantage of using normal activity rather than expected actual activity as a denominator in computing the predetermined overhead rate?

Problem 10A-12 Selection of a Denominator; Overhead Analysis; Standard Cost Card [L010-3, LO10-4] Morton Company's budgeted variable manufacturing overhead is $2.00 per direct labor-hour and its budgeted fixed manufacturing overhead is $420,000 per year. The company manufactures a single product whose standard direct labor-hours per unit is 2.0 hours. The standard direct labor wage rate is $27 per hour. The standards also allow 2 feet of raw material per unit at a standard cost of $5 per foot. Although normal activity is 50,000 direct labor-hours each year, the company expects to operate at a 40,000-hour level of activity this year. Required: 1. Assume that the company chooses 40,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements 2. Assume that the company chooses 50,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements. 3. Complete two standard cost cards as outlined below. 4. Assume that the company actually produces 22,300 units and works 46,000 direct labor-hours during the year. Actual manufacturing overhead costs for the year are Variable manufacturing overhead cost Fixed manufacturing overhead cost Total manufacturing overhead cost $ 101,200 425,000 $526,200 a. Compute the standard direct labor-hours allowed for this year's production. b. Complete the Manufacturing Overhead T-account below. Assume that the company uses 40,000 direct labor-hours (normal activity) as the denominator activity figure in computing predetermined overhead rates, as you have done in (1) above. c. Determine the cause of the underapplied or overapplied overhead for the year by computing the variable overhead rate and efficiency variances and the fixed overhead budget and volume variances. Req 1 Req 2 Req 3 Req 4A Req 4B Req 4C Assume that the company chooses 40,000 direct labor-hours as the denominator level of activity. Compute the predetermined overhead rate, breaking it down into variable and fixed cost elements. (Round your answers to 2 decimal places.) Predetermined overhead rate Variable element Fixed element per DLH per DLH per DLH