Amberjack Company is trying to decide on an allocation base to use to assign manufacturing overhead to jobs. The company has alw
ays used direct labor hours to assign manufacturing overhead to products, but it is trying to decide whether it should use a different allocation base such as direct labor dollars or machine hours. Actual and estimated data for manufacturing overhead, direct labor cost, direct labor hours, and machine hours for the most recent fiscal year are summarized here:
Estimated Value Actual Value
Manufacturing overhead cost $594,000 $655,000
Direct labor cost $396,000 $450,000
Direct labor hours 16,500 hours 18,000 hours
Machine hours 7,500 hours 8,500 hours
Required:
1. Based on the company's current allocation base (direct labor hours), compute the following:
a. Predetermined overhead rate.
b. Applied manufacturing overhead.
c. Over- or underapplied manufacturing overhead.
2. If the company had used direct labor dollars (instead of direct labor hours) as its allocation base, compute the following:
a. Predetermined overhead rate.
b. Applied manufacturing overhead.
c. Over- or underapplied manufacturing overhead.
3. If the company had used machine hours (instead of direct labor hours) as its allocation base, compute the following:
a. Predetermined overhead rate.
b. Applied manufacturing overhead.
c. Over- or underapplied manufacturing overhead.
<span>This would show that Will does not have a homothetic preference for hamburgers. Such preferences are shown to not be effected by income or scale, and since Will has changed his eating preferences based upon this new source of income, such a description would not fit this good.</span>
