Question

E4-35 (similar to) Question Help The Ride-On - Wonder 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: (Click the icon to view the data.) Inventory balances on December 31, 2017 were as follows: (Click the icon to view the account balonces.) Read the requirements Requirement 1. Calculate the manufacturing overhead allocation rate Identify the formula and calculate the manufacturing overhead allocation rate. (Enter the result as a whole number.) - Overhead allocation rate

Answer 1

1. Given allocation method is manufacturing overhead cost is allocated using direct manufacturing labor cost. Hence, the formula for manufacturing overhead allocation rate is as follows.

Directmanufacturinglaborcost foreachaccount Manufacturingoverheadallocationrate = = Totaldirectmanufacturinglabor cost

Account	DM Lab cost	Allocation rate
WIP	23,000	10%
FGs	66,700	29%
COGS	140,300	61%
Total	230,000	100%

2. If budgeted manufacturing overhead cost > actual manufacturing overhead cost = Over-allocated manufacturing overhead

Over-allocated manufacturing overhead = Budgeted manufacturing overhead cost - Actual manufacturing overhead cost = 125,000 USD - 110,000 USD = 15,000 USD

3. a. Over-allocated manufacturing overhead will be credited to the COGS account or written off to COGS account, hence the 15,000 USD will be reduced from COGS value. The ending balances of each account will be as follows.

COGS = 576,150 USD - 15,000 USD = 561,150 USD

Account	Ending balance
WIP	33,400
FGs	225,450
COGS	561,150
Total	820,000

3. b. Over-allocated overheads will be credited to each account, hence ending balance in each account will be reduced with over-allocated manufacturing overhead. Over-allocated overhead is pro-rated as per the formula below.

Over-allocatedtobecreditedtoeachaccount = Endingbalanceinthataccountbe foreproration Total balanceofallaccounts

Account	Ending balance	Over-allocated	Ending balance after allocation
WIP	33,400	600	32,800
FGs	225,450	4,050	221,400
COGS	576,150	10,350	565,800
Total	835,000	15,000	820,000

3. c. Over-allocated manufacturing overhead in 2017 is allocated based on the following allocation rate.

Directmanufacturinglaborcost foreachaccount Manufacturingoverheadallocationrate = = Totaldirectmanufacturinglabor cost

Account	Ending bal.	Allocation rate	Overallocated	Ending balances
WIP	33,400	10%	1,500	31,900
FGs	225,450	29%	4,350	221,100
COGS	576,150	61%	9,150	567,000
Total	835,000	100%	15,000	820,000

4. I would chose 3.c. allocation of over-allocated manufacturing overhead based on the allocation rate, because I believe the allocation is more accurate and consistent than the other two methods.