Carmen has a bakery that specializes in dog food in a variety of sizes and flavors. Carmen uses a flexible budget to forecast manufacturing overhead, which is then allocated to products based on over hours. The annual flexible overhead budget is estimated to be $200,000 plus $15 per oven hour.
The budget number of oven hours for the year is 10,000. At the end of the year, it turns out that 10,500 oven hours were used and actual overhead cots totaled $370,000
1) Calculate the overhead application rate at the begining of the year.
2) Calculate the amount of under/over-absorbed overhead for the year.
3) The policy is to write off any under/over-absorbed overhead to cost of good sold at the end of the year. Will Carmen's next income rise or fall this year when the under/over-absorbed overhead is closed out?