GOALS AND OBJECTIVES ✓ To review Normal Costing procedures ✓ To review the reasons for using Normal Costing, its benefits and drawbacks ARIZONA CORPORATION manufactures custom widgets and uses a normal costing system. The following information is available for the most recent year, 2016: Overhead Machine hours Direct labor hours Prime cost Number of units Budgeted Actual $780,000 $800,000 137,000 150,000 15,000 18,000 453,000 $3,500,000 500,000 The company has chosen direct labor hours as the overhead cost driver. Although 15,000 direct labor hours were budgeted (expected) for the year, the factory has the capacity of 25,000 direct labor hours under perfect operating conditions. Under normal conditions, however, a practical capacity of only 20,000 direct labor hours and 167,000 machine hours can be attained. The company has chosen to use the practical capacity as their denominator activity rate for normalizing overhead./n2. WHY does overhead need to be allocated?

Fig: 1

Fig: 2