Question

4-34 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 follow- ing data are for 2011: 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 2011 End-of-Year Balance $8,000,000 1,250,000 750,000 ired 1. Compute the budgeted manufacturing overhead rate for 2011. 2. Compute the under or overallocated manufacturing overhead of Zaf Radiator in 2011. 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 2011 (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). Budgeted manufacturing overhead rate = Budgeted manufacturing overhead / Budgeted actual hours
= $4,800,000 / 80,000
= $60 per machine hour

2). Manufacturing overhead allocated = Actual hours * Budgeted overhead rate
= 75,000 * $60
= $4,500,000

Overhead underallocated = Actual manufacturing overhead - Overhead allocated
= $4,900,000 - $4,500,000
= $400,000

a). Writeoff to Cost of goods sold.

Work in process Finished Goods Cost of Goods Sold Total Dec 31, Account Writeoff balances (Before Underallocated Proration) overhead $ 750,000.00 $ 1,250,000.00 $ 8,000,000.00 $ 400,000.00 $ 10,000,000.00 $ 400,000.00 Dec 31, Account Balance (After Proration) $ 750,000.00 $ 1,250,000.00 $ 8,400,000.00 $ 10,400,000.00

b). Proration based on ending balances before proration.
Work in process = $400,000 * ($750,000 / $10,000,000) = $30,000
Finished Goods = $400,000 * ($1,250,000 / $10,000,000) = $50,000
Cost of goods sold = $400,000 * ($8,000,000 /$10,000,000) = $320,000

Work in process (7.5%) Finished Goods (12.5%) Cost of Goods Sold (80%) Total Dec 31, Account Writeoff balances (Before Underallocated Proration) overhead $ 750,000.00 $ 30,000.00 $ 1,250,000.00 $ 50,000.00 $ 8,000,000.00 $ 320,000.00 $ 10,000,000.00 $ 400,000.00 Dec 31, Account Balance (After Proration) $ 780,000.00 $ 1,300,000.00 $ 8,320,000.00 $ 10,400,000.00

c). Proration based on overhead allocated amount before proration:

Overhead Allocated:
Work in process = $60 * 4,000 = $240,000 (5.33%)
Finished Goods = $60 * 11,000 = $660,000 (14.67%)
Cost of goods sold = $60 * 60,000 = $3,600,000 (80.00%)
Total = $4,500,000 (100%)

Allocation of under allocated overhead:
Work in process = $400,000 * 5.33%= $21,320
Finished Goods = $400,000 * 14.67% = $58,680
Cost of goods sold = $400,000 * 80% = $320,000

Work in process Finished Goods Cost of Goods Sold Dec 31, Account Writeoff Dec 31, Account balances (Before Underallocated Balance (After Proration) overhead Proration) $ 750,000.00 $ 21,320.00 $ 771,320.00 $ 1,250,000.00 $ 58,680.00 $ 1,308,680.00 $ 8,000,000.00 $ 320,000.00 $ 8,320,000.00 $ 10,000,000.00 $ 400,000.00 $ 10,400,000.00 Total

3). Method in C). should be preferred because the allocated of the under-allocated amount is based on the overhead allocated to WIP, Finished goods and Cost of Goods sold and if there would be no under allocation, the total amount would be allocated on that basis already.