Question

The Row-On-Wave 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 :

Account	Ending Balance	2017 direct manufacturing labor cost in ending balance
Work in process $	41,500$	18,320
Finished goods	232,400	64,120
Cost of goods sold	556,100	146,560

Budgeted manufacturing overhead cost	$	135,000
Budgeted direct manufacturing labor cost	$	225,000
Actual manufacturing overhead cost	$	140,400
Actual direct manufacturing labor cost	$	229,000

Requirements

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 9 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

Part 1

Budgeted manufacturing overhead cost	/	Budgeted direct manufacturing labor cost	=	Overhead allocation rate
$135000	/	$225000	=	60%

Part 2

Actual manufacturing overhead	/	Allocated direct manufacturing overhead	=	Underallocated (Overallocated)
$140400	/	$137400	=	$3000

229000*60% = 137400

Part 3 A

Account	Ending balance
Work in process	41500
Finished goods	232400
Cost of goods sold	559100

Part 3 B

	Proportional (decimal)	x	(over-) under-allocated overhead	=	Adjustment
Work in process	0.05		3000		150
Finished goods	0.28		3000		840
Cost of goods sold	0.67		3000		2010

Work in process = 41500/(41500+232400+556100) = 0.05

Finished goods = 232400/(41500+232400+556100) = 0.28

Cost of goods sold = 556100/(41500+232400+556100) = 0.67

	Ending balance (original)	+	Adjustment	=	Ending balance (adjusted)
Work in process	41500		150		41650
Finished goods	232400		840		233240
Cost of goods sold	556100		2010		558110

Part 3 C

	Proportional (decimal)	x	(over-) under-allocated overhead	=	Adjustment
Work in process	0.08		3000		240
Finished goods	0.28		3000		840
Cost of goods sold	0.64		3000		1920

Allocated manufacturing overhead

Work in process = 18320*60% = 10992

Finished goods = 64120*60% = 38472

Cost of goods sold = 146560*60% = 87936

Work in process = 10992/(10992+38472+87936) = 0.08

Finished goods = 38472/(10992+38472+87936) = 0.28

Cost of goods sold = 87936/(10992+38472+87936)

	Ending balance (original)	+	Adjustment	=	Ending balance (adjusted)
Work in process	41500		240		41740
Finished goods	232400		840		233240
Cost of goods sold	556100		1920		558020

Part 4

The method that makes the most sense is to write off the adjustment to the cost of goods sold (method a). The amount of the over-under allocation amount is immaterial so the simplest method is acceptable.