Reference no: EM132458664
Problem - Effects the of Choice of Denominator
In setting up the annual factory budget at discussing Talisman Company, the production manager and the sales manager spent much time discussing the volume level. As a result, the factory manager prepared two estimates of factory overhead:
|
Volume
|
Total Factory Overhead
|
|
150,000 units
|
$540,000
|
|
170,000 units
|
$564,000
|
At the last moment however, the sales manager obtained another order, which prompted management to set the predetermined overhead rate per unit at the 180,000 unit level; this rate was applied during the year.
During the latter part of the year sales dropped unexpectedly. Production was reduced immediately; however, 60,000 units of the annual production remained unsold in finished-goods inventory. Actual overhead amounted to $560,000. When the overhead variances were being analyzed, an unfavorable denominator variance of $40,000 was determined.
Required -
1. Calculate the predetermined overhead rate used during the year and compute the over or under application of overhead at year end.
2. The company writes off overhead variances to cost of goods sold. What would have been the effect on the annual income statement and year-end balance sheet, had the company used the actual overhead rate (as discovered at year end), throughout the year, instead of the predetermined rate?