Question

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 following data are for 2017: 

Requirements

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

Part 1:

Budgeted Overhead	Budgeted Machine Hours	Budgeted Absorption Rate
4,875,000	65,000	= 4875000/65000
		75

Part 2:

Calculation of Over/Under Absoption of Overheads

Particulars	$
OH cost	4,875,000
Machine Hours	65,000
	75
Actual OH Incurred	5,125,000
Actual Machine Hours	60,000
Abosrbed	= 60000*75
	4,500,000
Under absoption of Overhead	625,000

a.

	Units	$	Trf to COGS	TOTAL
COGS	51,000	10,625,000	625,000	11,250,000
FG	7,000	1,250,000		1,250,000
WIP	2,000	625,000		625,000
	60,000	12,500,000	625,000	13,125,000

b.

	Units	$	Pro Transferred#1	TOTAL
COGS	51,000	10,625,000	531,250	11,156,250
FG	7,000	1,250,000	62,500	1,312,500
WIP	2,000	625,000	31,250	656,250
	60,000	12,500,000	625,000	13,125,000

#1: In the ratio of the total cost of COGS, Finished Goods and Work in Progress

c.

	Units	$	Pro Transferred#2	TOTAL
COGS	51,000	10,625,000	531,250	11,156,250
FG	7,000	1,250,000	72,917	1,322,917
WIP	2,000	625,000	20,833	645,833
	60,000	12,500,000	625,000	13,125,000

#2: In the ratio of the actual hours utilised for the production of units in COGS, Finished Goods and Work in Progress. (In the ratio of (i) OH actually allocated (Actual Hours*Budgeted Overhead rate) or (ii) the hours utilised for each of the component-Both will be the same)

Part 3:

The best method in the Part 2 above will be allocation of Under absorbed Overheads in the ratio of Actual Hours Utilised for the production of units in COGS, Finished Goods and Work in Progress. (Part 2-c)

This would be the correct method as it will lead to the allocation in the ratio of Machine Hours and will remove the error of estimation in estimating the Overhead cost in calculation of the budgeted Overhead expenses. This will result in the same allocation if there had been no error in the initial estimation of the amount of Overhead.