Question

4-39 Proration of overhead. (Z. Iqbal, adapted) The Zaf Radiator Company uses a normal-costing system with a single manufacturing overhead cost pool and machine-hours as the cost-allocation base. The fol- lowing data are for 2017: Budgeted manufacturing overhead costs $4,800,000 Overhead allocation base Machine-hours Budgeted machine-hours 80,000 Manufacturing overhead costs incurred $4,900,000 Actual machine-hours 75,000 Machine-hours data and the ending balances (before proration of under- or overallocated overhead) are as follows: Cost of Goods Sold Finished Goods Control Work-in-Process Control Actual Machine-Hours 60,000 11,000 4,000 2017 End-of-Year Balance $8,000,000 1,250,000 750,000 1. Compute the budgeted manufacturing overhead rate for 2017 2. Compute the under- or overallocated manufacturing overhead of Zaf Radiator in 2017. Dispose of this amount using the following: a. Write-off to Cost of Goods Sold b. Proration based on ending balances (before proration) in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold c. Proration based on the overhead allocated in 2017 (before proration) in the ending balances of Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold 3. Which method do you prefer in requirement 2? Explain.

Answer 1

	1	Manufacturing Overhead Rate for 2017
	A	Budgeted Manufacturing Overhead Cost	$4,800,000
	B	Budgeted Machine Hours	80000
	C=A/B	Budgeted Manufacturing Overhead Rate	$60	per Machine Hour
	2	Under/Overallocated Manufacturing Overhead
	D	Actual Machine hour	75000
	E	Budgeted Manufacturing Overhead Rate	$60
	F=D*E	Manufacturing Overhead allocated	$4,500,000
	G	Manufacturing Overhead Cost Incurred	$4,900,000
	H=G-F	Under allocated Manufacturing Overhead	$400,000
	a	WRITE OFF TO COST OF GOODS SOLD
		ACCOUNT TITLE	DEBIT	CREDIT
		Cost of goods sold	$400,000
		Manufacturing overhead		$400,000
	b	PRORATION BASED ON ENDING BALANCE
			Ending Balance
	a	Cost of goods sold	$8,000,000
	b	Finished Goods Control	$1,250,000
	c	Work in Process Control	$750,000
	T=a+b+c	Total	$10,000,000
	w1=a/T	Proportion of Cost of goods sold	0.800
	w2=b/T	Proportion of Finished Goods Control	0.125
	w3=c/T	Proportion of Work in Process Control	0.075
	w1*400000	Allocation to Cost of goods sold	$320,000
	w2*400000	Allocation to Finished Goods Control	$50,000
	w3*400000	Allocation to Work in Process Control	$30,000
		ACCOUNT TITLE	DEBIT	CREDIT
		Cost of goods sold	$320,000
		Work in Process Control	$50,000
		Finished Goods Control	$30,000
		Manufacturing Overhead		$400,000
	c	PRORATION BASED ON OVERHEAD ALLOCATED
			Overhead Allocated
	a	Cost of goods sold	$3,600,000	(60000*60)
	b	Finished Goods Control	$660,000	(11000*60)
	c	Work in Process Control	$240,000	(4000*60)
	T=a+b+c	Total	$4,500,000
	w1=a/T	Proportion of Cost of goods sold	0.800
	w2=b/T	Proportion of Finished Goods Control	0.147
	w3=c/T	Proportion of Work in Process Control	0.053
	w1*400000	Allocation to Cost of goods sold	$320,000
	w2*400000	Allocation to Finished Goods Control	$58,667
	w3*400000	Allocation to Work in Process Control	$21,333
		ACCOUNT TITLE	DEBIT	CREDIT
		Cost of goods sold	$320,000
		Work in Process Control	$58,667
		Finished Goods Control	$21,333
		Manufacturing Overhead		$400,000
	3	For smaller under/over absorption, it should be written off to cost of goods sold
		This method is simple , though not precise.
		For high under/over absorption, it should be prorated based on overhead allocated