HexBug manufactures and sells small robotic creatures that change direction when they encounter obstacles in their path. These battery-powered toys, some radio-controlled, sell for retail prices rang-ing from $6 to $25. HexBugs come in three styles: nanos (about an inch long), antes (about two inches long), and crabs (about three inches long). All three HexBugs are manufactured in a common manufacturing site. HexBug uses an absorption costing system that absorbs manufacturing overhead to the three styles based on direct material dollars. The single plantwide manufacturing overhead rate is predetermined prior to the beginning of the fiscal year using a flexible manufacturing overhead budget. Variable manufacturing overhead is budgeted to be $0.720 per direct material dollar, and annual fixed manufacturing overhead is budgeted to be $6.5 million. All three styles of Hexbugs are produced in batches of 1,000 bugs. The following table summarizes the budgeted and actual results of operation for the year:
Hexbug Styles Nano Ante Crab
Actual number of units produced (000s) 7,100 4,400 2,200
Budgeted variable distribution cost per 1000 $100 $250 $310
Budgeted production (000s) 6,350 4,800 2,300
Budgeted direct labor per 1000 $50 $150 $200
Price per 1000 $2,200 $6,300 $7,200
Actual direct material per unit per 1000 $740 $1,800 $2,300
Budgeted direct material per 1000 $750 $1,730 $2,130
a. Calculate the firmwide overhead rate for the year.
b. A batch of 1,000 Antes was produced in March that incurred $145 of direct labor and $1,650 of direct materials. How much overhead is absorbed by this batch of Antes pro-duced in March?
c. Actual overhead incurred during the year was $23,586,000. Calculate the amount of over- or underabsorbed overhead for the year.
d. HexBug writes off any over/underabsorbed overhead to cost of goods sold. What is the effect on earnings of writing off the over/underabsorbed overhead calculated in part ( c ) on net income? In other words, does net income increase or decrease relative to what net income was prior to the write-off of the over/underabsorbed overhead calculated in part ( c )?