Question

Financial Planning Partners Inc., employs 12 full-time CPAs and 10 paraprofessionals. Direct and indirect costs are applied on a professional labor-hour basis that includes both attorney and paraprofessional hours. Following is information for 2018: Budget $300,000 Actual $309,000 $118,000 $128.000 Indirect costs Annual salary of each attorney Annual salary of each paraprofessional Total professional labor- hours $31,500 $32,500 50,000 dlh 56,000 din When using a normal costing system, year-end accounting records will show that indirect costs are Select one: A. within budget B. overallocated C. perfectly allocated OD. underallocated

Answer 1

B. Overallocated

Overallocation is a situation where resource is allocated more than what is required. In normal costing, actual data is used to derive the cost of product, in this case, allocation.

Allocation of indirect labor ($300,000 / 50,000 × 56,000 dlh) = $ 336,000

Actual indirect labor = $309,000

Overallocation = 336,000 – 309,000 = $ 27,000

Hence, the correct option is b. overallocated