1a)Indeed, if overhead is over applied the year-end net income gets affected. As a result, of more overheads being over applied the inventory increase thus, enough overheads must be removed from the ending inventory in order to reduce discrepancies in the cost of goods sold. This is because due to overheads being over applied the cost of goods sold decreases and in the long run leads to an increase in net operating income occurs.
1b)Predetermined overhead rate = Estimate total manufacturing overhead cost / Estimate total amount of allocation base.
5,200,000/750,000 = $6.93per direct labor hour
Using predetermined units at 700,000 = 5,200,000/820,000 = $ 5.94 per direct labor hour
Difference in cost is = $ 6.93- $5.94 = $0.99.
1c) Assuming that Bytes Storage Company (BSC) uses cost pricing model that seeks to help the producer recover all the cost besides making a profit and being competitive in the market as it is more sensitive to costs. As a result, the decline in sales units could significantly mean increasing the cost price of the goods through allocation of the costs per unit. In the long run the prices of Bytes Storage Company (BSC) will become higher than that of its competitors and therefore, will lose its sales to the other companies resulting to decline in general sales.
Direct cost and indirect cost seeks to identify where the cost arises from however, they are
independent from fixed cost and variable cost because these considers the dependence of the cost with the volume of activity. Direct cost example is labor used in production whereas indirect cost includes salaries of supervisors (Tracy, 2008). On the other hand, fixed cost example is the rents and rates of the premises while variable cost includes the cost of materials used in production.
2) All direct costs are not avoidable. According to Keagy &Thomas (2004) asserts that although directs are more likely to be avoidable as compared to direct costs not all the direct costs can be avoided. This is because some costs are highly resistant to change such as depreciation costs.