Northcoast Manufacturing Company, a small manufacturer of appliance parts, has just completed its first year of operations. The company's controller, Vic Trainor, has been reviewing the results for the year and is concerned about the application of factory overhead. Trainor is using the following information to assess operations.
• Northcoast uses several machines with a combined cost of $2,200,000 and no residual value. Each machine has an output of five units of product per hour and a useful life of 20,000 machine hours.
• Selected actual data on Northcoast's operations for the year just ended are as follows:
Products manufactured......... 650,000 units
Machine use.............. 130,000 hours
Direct labor............... 35,000 hours
Labor rate.............. $15 per hour
Total factory overhead ......... $ 1,130,000
Cost of Goods Sold ........... $ 1,720,960
Finished Goods Inventory (year-end) ..... $ 430,240
Work in Process Inventory (year-end) .... $ 0
• Total factory overhead is applied based on direct labor cost using a predetermined plantwide rate.
• Budgeted activity for the year included 20 employees each working 1,800 productive hours per year to produce 540,000 units of product. Because the machines are highly automated, 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. Overhead was budgeted at $961,200.
a. Based on Northcoast Manufacturing Company's actual operations over the past year, was manufacturing overhead underapplied or overapplied? By how much?
b. How do you suggest disposing of the underapplied or overapplied overhead? Justify your answer.
c. Vic Trainor believes that Northcoast Manufacturing Company should apply manufacturing overhead based on machine hours. Calculate the predetermined overhead rate using that activity base.
d. If Northcoast Manufacturing Company had used machine hours as its application base, would manufacturing overhead have been underapplied or overapplied? By how much?
e. Explain why machine hours would be a more appropriate application base than direct labor cost.