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

137,000

15,000

453,000

$800,000

150,000

18,000

$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./n13. If the company wants to minimize the amount of over/underapplied overhead, which of the possible

activity bases would accomplish this? WHY? What would be the DISADVANTAGE of using this

method? What do you think GAAP says on this? Do you think the IRS would care?