Question

The Wamth Radiator Company uses a​ normal-costing system with a single manufacturing overhead cost pool and​ machine-hours as the​ cost-allocation base. The following data are for 2017​:

Budgeted Manufacturing Overhead Costs	$ 5,225,000
Overhead Allocation Base	machine-hours
Budgeted machine-hours	95,000
Manufacturing Overhead Costs Incurred	$ 5,425,000
Actual machine-hours	100,000

Machine-hours data and the ending balances​ (before proration of​ under- or overallocated​ overhead) are as​ follows:

	Actual Machine-Hours	2017 End-of-Year Balance
Cost of Goods Sold	75,000	$ 9,750,000
Finished Goods Control	18,000	2,275,000
Work-in-Process Control	7,000	975,000

Question:

1.	Compute the budgeted manufacturing overhead rate for 2017.
2.	Compute the​ under- or overallocated manufacturing overhead of Wamth Radiator in 2017. 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 2017 (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

Ques 1
1. Budgeted manufacturing overhead rate is
(5225000/95000)	$                           55.00	per MH
Ques 2
Allocated manufacturing overhead=	5500000
(55*100000)
incurred manufacturing overhead	5425000
overerallocation	-75000
a.write off
Account	Account balance(before proration)	Write off	Account balance(after proration)
Work in Process	$975,000	$0	$975,000
Finished Goods	2,275,000	0	$2,275,000
Cost of Goods Sold	9,750,000	-75,000	$9,675,000
Total	$13,000,000	($75,000)	$12,925,000
b.
			overallocated overhead	proration
Work in Process	$975,000	7.50%	-75,000	-5625
Finished Goods	$2,275,000	17.50%	-75,000	-13125
Cost of Goods Sold	$9,750,000	75.00%	-75,000	-56250
Total	$13,000,000
Account	Account balance(before proration)	Proration of overallocated overheads	Account balance(after proration)
Work in Process	$975,000	($5,625)	$969,375
Finished Goods	$2,275,000	($13,125)	$2,261,875
Cost of Goods Sold	$9,750,000	($56,250)	$9,693,750
Total	$13,000,000	($75,000)	$12,925,000
c)
			overallocated overhead	proration
Work in Process(55*7000)	$385,000	7.00%	-75,000	(5,250)
Finished Goods(55*18000)	$990,000	18.00%	-75,000	(13,500)
Cost of Goods Sold(55*75000)	$4,125,000	75.00%	-75,000	(56,250)
Total	$5,500,000
Account	Account balance(before proration)	Proration of overallocated overheads	Account balance(after proration)
Work in Process	$975,000	($5,250)	$969,750
Finished Goods	$2,275,000	($13,500)	$2,261,500
Cost of Goods Sold	$9,750,000	($56,250)	$9,693,750
Total	$13,000,000	($75,000)	$12,925,000
Ques 3
3. Alternative (c) is theoretically preferred over (a) and (b) because the overderallocated amount and the balances in work-in-process and finished goods inventories are material. Alternative (c) yields the same ending balances in work in process, finished goods, and cost of goods sold that would have been reported had actual indirect cost rates been used.