Alexa Anderson, the manager of Aromatic Air Purifiers, is analyzing the company's MOH costs from last year. Alexa has always followed an actual costing system when determining the costs of its air purifiers but Alexa is wondering if it would be better to switch to a normal costing system, as she had recently read about its advantages in an industry trade magazine.
As Aromatic Air Purifiers has a highly machine-intensive operation, machine hours are used as its MOH cost driver. Here are the costs and other MOH information Alexa is analyzing:
Required:
a. Determine the actual MOH rate and the budgeted MOH rate Aromatic would have used last year under actual costing and normal costing, respectively.
b. Calculate total applied MOH under normal costing for last year.
c. How much would Aromatic have been underapplied or overapplied in its MOH costs if it had followed a normal costing system?
d. What are the key advantages and disadvantages of both of these systems, and what would that mean for Aromatic's ability to price its products if it bases its selling price on cost?

Question

Alexa Anderson, the manager of Aromatic Air Purifiers, is analyzing the company's MOH costs from last year. Alexa has always followed an actual costing system when determining the costs of its air purifiers but Alexa is wondering if it would be better to switch to a normal costing system, as she had recently read about its advantages in an industry trade magazine.
As Aromatic Air Purifiers has a highly machine-intensive operation, machine hours are used as its MOH cost driver. Here are the costs and other MOH information Alexa is analyzing:
  Required:
a. Determine the actual MOH rate and the budgeted MOH rate Aromatic would have used last year under actual costing and normal costing, respectively.
b. Calculate total applied MOH under normal costing for last year.
c. How much would Aromatic have been underapplied or overapplied in its MOH costs if it had followed a normal costing system?
d. What are the key advantages and disadvantages of both of these systems, and what would that mean for Aromatic's ability to price its products if it bases its selling price on cost?

Quizplus · Accepted Answer

The Answer of Alexa Anderson, the manager of Aromatic Air Purifiers, is analyzing the company's MOH costs from last year. Alexa has always followed an actual costing system when determining the costs of its air purifiers but Alexa is wondering if it would be better to switch to a normal costing system, as she had recently read about its advantages in an industry trade magazine.
As Aromatic Air Purifiers has a highly machine-intensive operation, machine hours are used as its MOH cost driver. Here are the costs and other MOH information Alexa is analyzing:
  Required:
a. Determine the actual MOH rate and the budgeted MOH rate Aromatic would have used last year under actual costing and normal costing, respectively.
b. Calculate total applied MOH under normal costing for last year.
c. How much would Aromatic have been underapplied or overapplied in its MOH costs if it had followed a normal costing system?
d. What are the key advantages and disadvantages of both of these systems, and what would that mean for Aromatic's ability to price its products if it bases its selling price on cost?

Alexa Anderson, the Manager of Aromatic Air Purifiers, Is Analyzing