Question

The Row - On - Wave Company (ROW) produces a line of non-motorized boats. ROW uses a normal-costing system and allocates manufacturing overhead using direct manufacturing labor cost. The following data are for 2017 :

Account	Ending Balance	2017 direct manufacturing labor cost in ending balance
Work in process $	41,500$	18,320
Finished goods	232,400	64,120
Cost of goods sold	556,100	146,560

Budgeted manufacturing overhead cost	$	135,000
Budgeted direct manufacturing labor cost	$	225,000
Actual manufacturing overhead cost	$	140,400
Actual direct manufacturing labor cost	$	229,000

 Requirements

1. Calculate the manufacturing overhead allocation rate.

2. Compute the amount of under-or overallocated manufacturing overhead.

3. Calculate the ending balances in work in process, finished goods, and cost o. goods sold if under- or overallocated manufacturing overhead is as follows:

a. Written off to cost of goods sold

b. Prorated based on ending balances (before proration) in each of the three accounts

c. Prorated based on the overhead allocated in 2017 in the ending balances (before proration) in each of the three accounts

4. Which method would you choose? Justify your answer.

Answer 1

1. Budgeted Manufacturing Overhead / Budgeted cost allocation base i.e. Direct Labor Cost
= $135000 / $225000 = 60% of DL Cost

2. Actual Manufacturing Overhead - Allocated Manufacturing Overhead
= $140400 - $229000 x 60% = $3000 i.e. Underallocated Overhead

3.
a.

	Work in Process	Finished Goods	Cost of Goods Sold
Balance before adjustment	$     41,500	$      232,400	$      556,100
Overhead adjustment			$          3,000
Ending Balance after adjustment	$     41,500	$      232,400	$      559,100

b.

	Balance before adjustment (1)	Proportion (2) = (1) / $830000	Underallocated oVerhead (3)	Adjustment (2) x (3)
Work in Process	$     41,500	5.00%	$          3,000	$          150
Finished Goods	$   232,400	28.00%	$          3,000	$          840
Cost of Goods Sold	$   556,100	67.00%	$          3,000	$       2,010
	$   830,000

	Work in Process	Finished Goods	Cost of Goods Sold
Balance before adjustment	$     41,500	$      232,400	$      556,100
Overhead adjustment	$          150	$             840	$          2,010
Ending Balance after adjustment	$     41,650	$      233,240	$      558,110

(c)

	Direct Labor Cost in Ending Balance (1)	Overhead Allocated (2) = (1) x 60%	Proportion (3) = (2) / $137400	Underallocated oVerhead (4)	Adjustment (3) x (4)
Work in Process	$       18,320	$            10,992	8.00%	$       3,000	$        240
Finished Goods	$       64,120	$            38,472	28.00%	$       3,000	$        840
Cost of Goods Sold	$     146,560	$            87,936	64.00%	$       3,000	$     1,920
	$     229,000	$          137,400

	Work in Process	Finished Goods	Cost of Goods Sold
Balance before adjustment	$       41,500	$          232,400	$      556,100
Overhead adjustment	$            240	$                 840	$          1,920
Ending Balance after adjustment	$       41,740	$          233,240	$      558,020