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

$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?