P9-5 Pool Scrubbers manufactures three different models of swimming pool cleaners (710, 720 and 830). These are sophisticated computer-controlled, programed cleaners that scrub and vacuum the pool’s bottom, walls, and steps and provide supplemental fil

P9-5

  Pool Scrubbers manufactures three different models of swimming pool cleaners (710, 720 and 830).  These are sophisticated computer-controlled, programed cleaners that scrub and vacuum the pool’s bottom, walls, and steps and provide supplemental filtration of pool water.  The three models differ in their capacity and programmability.

  Pool Scrubbers use absorption costing system that absorbs manufacturing overhead to three models based on direct labor hours.  The single plant wide manufacturing overhead rate is predetermined before the beginning of the fiscal year using a flexible manufacturing over-head budget.  Variable manufacturing overhead is budgeted to be $3.00 per direct labor hour, and fixed manufacturing overhead is budgeted to be $1.4 million.  Direct labor is budgeted at $25 per direct labor hour.  The following table summarizes the budgeted and actual results of operation for the year:

Required:

1. Calculate the firm wide overhead rate for the year (round to four decimals).  The overhead rate is calculated before the fiscal year begins.
2. A batch of 100 units of model 720 is produced using 405 direct labor hours.  How much overhead is absorbed by this batch of 100 model 720’s
3. Actual overhead incurred during the year was $1,520,500.  Calculate the amount of overhead or under absorbed overhead for the year.

Scrubbers write off any over/under absorbed overhead to the coast of goods sold.  What is the effect on earnings of writing off the over/under absorbed overhead calculated in part 3 above on net income?  In other words, does net income increase or decrease the relative to what net income was prior to the write-off of the over/under absorbed overhead calculated in part 3 above?