Question

ABC Manufacturing Inc. ends the month with two jobs still in progress. Job 5 has​ $10,000 of​ materials, $2,000 of direct labor and​ $8,000 of manufacturing overhead allocated. Job 6 was​ $30,000 of​ materials, $2,000 of direct labor and​ $10,000 of manufacturing overhead allocated. The cost of goods sold for the month was​ $40,000 and of that​ 30% was overhead. There were no finished goods in stock as the month ends. If the manufacturing overhead is underallocated by​ $10,000, which of the following choices would be the correct way to prorate​ it, assuming the proration is based on the allocated overhead in the ending balances of​ work-in-process, finished​ goods, and cost of goods​ sold?

A.

Job 5 would be allocated another​ $2,500 of cost

B.

Job 6 would be allocated another​ $4,000 of cost

C.

Cost of goods sold would be reduced by​ $3,300

D.

Cost of goods sold would be increase by​ $10,000

Answer 1

Answer: Option-(A): Job 5 would be allocated another $2,500 of cost NOTE: Calculated amount is $2,667 as shown below. But $2,500 is the closest amount to the calculated amount. Option-C is incorrect as COGS shall be increased when underallocated OH is prorated but it is given as COGS would be reduced Workings: Job 5 $8,000 Job 6 $10,000 Overhead allocated $18,000 $12,000 [$8,000+$10,000] Allocated OH in ending WIP Allocated OH in COGS Option-D is incorrect as underallocated OH shall be prorated between WIP, FG and COGS but it is given as entire $10,000 is allocated to COGS [ $40,000 x 30%) When underapplied overhead of $10,000 is allocated between ending WIP and COGS Underapplied overhead prorated to WIP Underapplied overhead prorated to COGS $6,000 $4,000 [$10,000 x $18,000/ ($18,000+ $12,000)] [$10,000 x $12,000/ ($18,000+ $12,000)] Therefore Underallocated overhead allocated to Job5 2,667 [$6,000 x $8,000 ($8,000 $10,000)] Underallocated overhead allocated to Job6 $3,333 S6,000 x $10,000 ($8,000 + $10,000)]