The Zaf Radiator Company uses a normal -cost accounting system with a single man

Question

The Zaf Radiator Company uses a normal -cost accounting system with a single manufacturing overhead cost pool and machine-hours as the cost -allocation base. The following 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:
Actual Machine-Hours 2011 End-of-Year Balance
Cost of Goods sold 60,000 $8,000,000
Finished Goods Control 11,000 1,250,000
Work-in Process Control 4,000 750,000

Required:
1. Compute the budgeted manufacturing overhead rate for 2011.
2. Compute the under - or overallocated manufacturing overhead of Zaf Radiator for 2011. Dispose of this amount using the following:
a. Write-off to cost of goods sold
b. Proration based on the ending balances (before proration) in Work-In Process
Control, Finished Goods Control, and Costs 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 costs of goods sold
3. Which method do you prefer in requirement 2? Explain.

Explanation / Answer

Req 1: Pre-determined Overheads rate: Estimated Overheads / Estimated machine hours ($ 4800,000 /80,000 MH) = $ 60 per Mh Req 2: Under/Over-applied Overheads: Actual manufacturing overheads incurred 4,900,000 Less: Overheads Applied (75000 hours @60) 4500000 Under-applied overheads 400,000 Req 2-a Journal entry Date Account title and explanations Debit $ Credit $ 2011 Cost of Goods sold Dr. 400,000      Manufacturing Overheads 400,000 Req 2-b Allocation of Under-applied Overhead on the basis of ending Balance Inventory Ending Balance Under-applied OH allocated Wwork in Process 750,000 30000 Finished Goods 1,250,000 50000 Cost of Goods sold 8,000,000 320000 TOTAL 10,000,000 400,000 Journal entry Date Account title and explanations Debit $ Credit $ 2011 Cost of Goods sold Dr. 320,000 Work in process Inventory Dr. 30,000 Finished Goods Inventory Dr. 50,000      Manufacturing Overheads 400,000 Req 2-c Allocation of Under-applied Overhead on the basis of OH absorbed durirng the year in respective accounts: Inventory MH used Under-applied OH allocated Wwork in Process 4,000 21333 Finished Goods 11,000 58667 Cost of Goods sold 60,000 320000 TOTAL 75,000 400,000 Journal entry Date Account title and explanations Debit $ Credit $ 2011 Cost of Goods sold Dr. 320,000 Work in process Inventory Dr. 21,333 Finished Goods Inventory Dr. 58,667      Manufacturing Overheads 400,000 Req 3: The best method of allocation of Under applied OH is proration on the basis of overheads absorbed earlier (i.e. Machine hours used earlier) As the overheads should have been absorbed on the basis of machine hours only.

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