Problem

The Easton plant produces sheet metal chassis for television sets. Its customer is Gener...

The Easton plant produces sheet metal chassis for television sets. Its customer is General Electric Appliances. The chassis are manufactured on a computerized, numerically controlled (NC) machine that cuts, drills, and bends the metal to form the chassis for the television set. Two different chassis are produced: HX-3 and DX-55.

Easton has a single plantwide overhead account. Actual machine minutes on the NC machine are used to distribute overhead to the two products. There were no beginning inventories of work in process or finished goods. The following table summarizes the planned and actual production data for the year:

HX-3

DX-55

Planned unit production

6,500

3,400

Budgeted machine minutes per unit

X 6.2

X 9.8

Expected machine minutes

40,300

33,320

Actual units produced

7,200

3,900

Actual volume (machine minutes)

44,640

38,220

The following data summarize the flexible overhead budget:

Fixed

Variable (per Minute)

Depreciation

$695,000

Indirect labor

$0.80

Indirect materials

1.00

Property taxes

28,000

Utilities

55,000

0.90

Other

42,000

0.30

Total

$820,000

$3.00

At the end of the year, the following overhead amounts had been incurred:

Actual

Depreciation

$ 695,000

Indirect labor

71,288

Indirect materials

84,860

Property taxes

31,000

Utilities

133,074

Other

68,858

Total

$1,084,080

Any over- or underabsorbed overhead is written off to cost of goods sold. The ending finished goods inventory consists of 2,000 units of HX-3 and 1,000 units of DX-55, representing 13,400 minutes and 10,300 minutes of actual machine time, respectively.

Required: (Round all dollars, including overhead rates, to two decimal places.)

a. Calculate the overhead absorption rate set at the start of the year.

b. Calculate the over- or underabsorbed overhead for the year.

c. The firm is considering switching to variable costing. What effect would this decision have on Easton’s reported profit for this year? To implement variable costing at the end of the year, variable overhead is calculated as $3.00 per machine minute times the actual number of machine minutes. Fixed overhead is the difference between total actual overhead and variable overhead.

d. Instead of defining fixed overhead as all overhead in excess of variable overhead as in part (c), assume the following: Fixed overhead is budgeted fixed overhead ($820,000), and variable overhead is the difference between total actual overhead and budgeted fixed overhead. What is the difference between absorption net income and variable costing income given these new assumptions?

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