Ricardo Windows specializes in making custom windows for high-end homes. Although the demand for custom windows fluctuates from year to year, the owner, Javier Ricardo, believes that it is in his company’s long-term interest to maintain a stable workforce and a certain capacity level. At the end of the most recent year, the company’s accountant prepared the following overhead projections for the next two years. Ricardo Windows applies overhead to jobs using a predetermined overhead rate based on direct labor dollars.

Required:
a. Compute the total overhead rate for each of the next two years using budgeted direct labor cost.
b. Compute the total overhead rate for each of the next two years using “normal” labor cost.
c. Project the amount of underapplied or overapplied overhead in each of the next two years using the overhead rates based on budgeted direct labor cost.
d. Project the amount of underapplied or overapplied overhead in each of the next two years using the overhead rates based on normal direct labor cost.
e. Provide a brief discussion of your answers to parts (c) and (d). Comment on the differences between using budgeted and normal volumes to calculate overhead applicationrates.

Year I Year 2 Fixed overhead $1,000,000 $1,000,000 $0.40 $800,000 $1,200,000 N vol (direct labor co $1,000,000 $1,000,000 Variable overhead per DLS Budgeted direct labor cost S0.40