Northcoast Manufacturing Company, a small manufacturer of appliance parts, has just completed

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 four 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                        . . . . . . . . . . . . . . . . 350,000 units

Machine use                                           . . . . . . . . . . . . . . . .   92,000 hours

Direct labor                                            . . . . . . . . . . . . . . . .    17,500 hours

Labor rate                                              . . . . . . . . . . . . . . . .     $15 per hour

Total factory overhead                         . . . . . . . . . . . . . . . .    $       820,000

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 plant-wide rate.
• Budgeted activity for the year included 10 employees each working 1,800 productive hours per year  to produce 400,000 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 $810,000.

Required

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.

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