DigitalEar Invented and Patented a New Digital Behind-The-Ear Hearing Aid $\quad$

question 11

Essay

DigitalEar invented and patented a new digital behind-the-ear hearing aid with adaptive noise reduction and automatic feedback cancellation. DigitalEar produces four different models of its DigitalEar device. The following table summarizes the planned production levels, costs, and selling prices for the four DigitalEar devices for this year: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {Digital Ear Hearing Aid Models}$
$\begin{array}{|l|r|r|r|l|}\hline \begin{array}{l}\text { Budgeted production } \\\text { and sales (units) }\end{array} & 12,000 & 8,000 & 5,000 & 3,000 \\\hline \text { Selling price } & \$ 500 & \$ 600 & \$ 700 & \$ 1,000\\\hline \begin{array}{l}\text { Direct labor }(D L) \text { hours } \\\text { per unit }\end{array} & 2.0 & 2.8 & 3.0 & 3.5 \\\hline \text { Direct material per unit } & \$ 110 & \$ 120 & \$ 130 & \$ 150 \\\hline \begin{array}{l}\text { Direct labor cost } \\\text { (wages, benefits, and }\end{array} & & & & \\\text { payroll taxes) per DL } & \$ 25 & \$ 25 & \$ 25 & \$ 25 \\\text { hour } & & & & \\\hline\end{array}$

DigitalEar allocates both fixed and variable manufacturing overhead to the four devices using a single overhead rate, which includes both fixed and variable manufacturing overhead. The number of direct labor hours in each device is used as the allocation base for assigning overhead to hearing aids. Budgeted volume measured using direct labor hours is calculated using the budgeted sales of each device. Variable manufacturing overhead is budgeted at $12.00 per direct labor hour and fixed manufacturing overhead is budgeted this year at $2,157,000.
Required:
a. Calculate DigitalEar's budgeted manufacturing overhead rate per direct labor hour for this year.
b. Using absorption costing, calculate the budgeted manufacturing cost per unit for each of DigitalEar's four hearing aid devices.
c. During the year, actual manufacturing overhead incurred (fixed plus variable) was $3,110,000, and the actual number of direct labor hours used producing the four hearing aids was: $$\begin{array} { | l | r | r | r | r | } \hline & \text { A21 } & \text { B45 } & \text { C24 } & \text { D88 } \\\hline \text { Actual direct labor hours } & 26,000 & 23,800 & 18,600 & 12,250 \\\hline\end{array}$$ Calculate the over- or under-absorbed overhead DigitalEar for this year.
d. Assuming that the entire over- or under-absorbed overhead you calculated in part (c) is written off to cost of goods sold, does this write-off increase or decrease net income before taxes? Explain.

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Definitions:

Purchased Amount

The total volume or quantity of goods or services bought.

Normal Good

A good whose demand increases as consumers' income rises, holding all other factors constant.

Consumption

Consumption refers to the use of goods and services by households. It is a primary component of the economy, encompassing the spending on goods and services by consumers.

Income

Money received, especially on a regular basis, for work or through investments.