✓ 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
$780,000
137,000
15,000
453,000
Actual
$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./n14. ASSUME that direct labor hours are a proper driver for the company and that the vast majority of the
overhead is FIXED in nature. Does it sound like the company is effectively utilizing their fixed costs, yes
or no and WHY? What dollar amount of fixed overhead, if any, is unutilized or wasted?
Fig: 1
Fig: 2