Question

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

Budgeted manufacturing overhead cost	$	125,000
Budgeted direct manufacturing labor cost	$	250,000
Actual manufacturing overhead cost	$	110,000
Actual direct manufacturing labor cost	$	230,000

Account	Ending Balance	2017 direct manufacturing labor cost in ending balance
Work in process $	33,400 $	23,000
Finished goods	225,450	66,700
Cost of goods sold	576,150	140,300

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 of 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
Manufacturng overhead allocation rate	Budgeted manufacturing overhead rate/Budgeted direct manufacturing labor costs
Manufacturng overhead allocation rate	125000/250000
Manufacturng overhead allocation rate	50.00%
2.
Under or over allocated manufacturing overhead	Actual manufacturing costs - Allocated manufacturing overhead
Under or over allocated manufacturing overhead	110,000-(50%*230000)
Under or over allocated manufacturing overhead	110,000-115000
Over allocated manufacturing overhead	$5,000
The manufacturing overhead allocated is higher than actual manufacturing costs and thus is over allocated.
3.
a.
Account	Pre-adjusted ending balance	Adjustment	Post adjustment ending balance
Work in process	$33,400	$0	$33,400
Finished goods	$225,450	$0	$225,450
Cost of goods sold	$576,150	$5,000	$571,150
b.
Account	Pre-adjusted ending balance	Weights		Adjustment	Post adjustment ending balance
Work in process	$33,400	4.00%	33400/835000	200	$33,200	5000*4%
Finished goods	$225,450	27.00%	225450/835000	1350	$224,100	5000*27%
Cost of goods sold	$576,150	69.00%	576150/835000	3450	$572,700	5000*69%
	$835,000
c.
Account	Overhead allocated		Weight of overhead allocated		Pre-adjusted ending balance	Adjustment		Post adjustment ending balance
Work in process	11500	23000*50%	10.00%	11500/115000	$33,400	$500	5000*10%	$32,900
Finished goods	33350	66700*50%	29.00%	33350/115000	$225,450	$1,450	5000*29%	$224,000
Cost of goods sold	70150	140300*50%	61.00%	70150/115000	$576,150	$3,050	5000*61%	$573,100
	115000
4.
The third method of allocating in proportion to the overhead allocated is more appropriate.