presented here.
Product manufactured 500,000 units
Machine utilization 130,000 hours
Direct labor usage 35,000 hours
Labor rate $15 per hour
Total production overhead $1,130,000
Cost of goods sold $1,720,960
Finished goods inventory (at year–end) $430,240
Work in process inventory (at year–end) $0
• Total production overhead is allocated to each unit using an estimated plantwide
rate for direct labor dollars.
• The budgeted activity for the year included 20 employees, each working 1,800
productive hours per year to produce 540,000 units of product. The machines are
highly automated, and each employee can operate two to four machines
simultaneously. Normal activity is for each employee to operate three machines.
Machine operators are paid $15 per hour.
• Budgeted production overhead costs for the past year for various levels of activity
are shown here.
REQUIRED: You may want to use a spreadsheet to perform calculations.
• A. Choose the budgeted level of activity (in units) closest to actual activity for
the period and determine the dollar amount of total over– or underapplied
production overhead. Explain why this amount is material.
• B. Vic Trainor believes that Northcoast Manufacturing Company should be using
machine hours to allocate production overhead. Using the data given, determine
the amount of total over/underapplied production overhead if machine hours had
been used as the allocation base.
• C. Explain why machine hours might be a more appropriate allocation base
than number of units.
• D. Explain why allocating production overhead to units might cause managers
to build up inventories under absorption costing in periods when sales were
slumping
