Question

1. Moira Company has just finished its first year of operations and must decide which method to use for adjusting cost of goods sold. Because the company used a predetermined overhead rate based on Direct Labor Hours with the following relevant information:

Budgeted Manufacturing Overhead	$500,000
Actual Manufacturing Overhead	$400,000
Budgeted Direct Labor Hours	20,000 hours
Actual Direct Labor Hours	21,000 hours

Ending balances in the relevant accounts were:

Raw Materials	$26,432
Work-in-Process	40,000
Finished Goods	80,000
Cost of Goods Sold	680,000

1. Prepare the entry to record the actual manufacturing overhead that was incurred (50% was depreciation and 50% utilities payable).
2. Record the entry to allocate the overhead to the jobs.
3. How much is the overhead under-allocated or over-allocated?
4. Prepare the entry to close out the over or under allocated at the end of the period if it is not prorate
5. Prepare the entry at the end of the period if it is prorated.
6. Would you recommend that closing out the overhead should follow d or e.  Explain your answer.

Answer 1

1)	Account titles & Explanations					Debit	Credit
	Manufacturing overhead					400,000
	Accumulated depreciation						200,000
	utilities payable						200,000
2)	overhead allocated to jobs
	500,000/20,000*21000
	525000
3)	overapplied overhead
	applied overhead					525,000
	Actual overhead					400,000
	overhead overapplied					125,000	answer
4)	Account titles & Explanations					Debit	Credit
	manufacturing overhead					125,000
	cost of goods sold						125,000
5)	Account titles & Explanations					Debit	Credit
	Manufacturing overhead					125,000
	Work in process						6250
	finished goods						12500
	cost of goods sold						106,250
6)	should follow e as the amount of overhead overapplied is high so it would be
	better to use prorated method otherwise the cost of goods sold will be expectionally
	low

Answer 2

1)	Account titles & Explanations	Debit	Credit
	Manufacturing overhead	400,000
	Accumulated depreciation		200,000
	utilities payable		200,000
2)	overhead allocated to jobs
	500,000/20,000*21000
	525000
3)	overapplied overhead
	applied overhead	525,000
	Actual overhead	400,000
	overhead overapplied	125,000	answer
4)	Account titles & Explanations	Debit	Credit
	not prorated
	manufacturing overhead	125,000
	cost of goods sold		125,000
5)	Account titles & Explanations	Debit	Credit
	prorated
	(125000/800000) = 0.15625
	Manufacturing overhead	125,000
	Work in process (40000*0.15625)		6250
	finished goods (80000*0.15625)		12500
	cost of goods sold (680000*0.15625)		106,250
6)	should follow e as the amount of overhead overapplied is high so it would be
	better to use prorated method otherwise the cost of goods sold will be expectionally
	low