Over/Underhead Rates

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Scrubbers manufactures three different models of swimming pool cleaners (710,
720 and 830).  These are sophisticated
computer-controlled, programed cleaners that scrub and vacuum the pool’s
bottom, walls, and steps and provide supplemental filtration of pool
water.  The three models differ in their
capacity and programmability.

Scrubbers use absorption costing system that absorbs manufacturing overhead to
three models based on direct labor hours. 
The single plant wide manufacturing overhead rate is predetermined before
the beginning of the fiscal year using a flexible manufacturing over-head
budget.  Variable manufacturing overhead
is budgeted to be $3.00 per direct labor hour, and fixed manufacturing overhead
is budgeted to be $1.4 million.  Direct
labor is budgeted at $25 per direct labor hour. 
The following table summarizes the budgeted and actual results of
operation for the year:





Actual number of units produced




Actual DL hours per unit




Budgeted wholesale price




Budgeted direct labor hours per scrubber




Budgeted direct materials




Budgeted production (units)




Budgeted DL Cost (@ $25 per DL Hour)





  1. Calculate the firm wide overhead rate for the
    year (round to four decimals).  The
    overhead rate is calculated before the fiscal year begins.

  2. A batch of 100 units of model 720 is produced
    using 405 direct labor hours.  How much
    overhead is absorbed by this batch of 100 model 720’s

  3. Actual overhead incurred during the year was
    $1,520,500.  Calculate the amount of
    overhead or under absorbed overhead for the year.

Scrubbers write off any over/under absorbed
overhead to the coast of goods sold. 
What is the effect on earnings of writing off the over/under absorbed
overhead calculated in part 3 above on net income?  In other words, does net income increase or
decrease the relative to what net income was prior to the write-off of the
over/under absorbed overhead calculated in part 3 above?

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