The Ride-On-Wave Company (ROW) produces a line of non-motorized boats. ROW uses

Question

The Ride-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 2014:

Budgeted manufacturing overhead cost $125,000

Budgeted direct manufacturing labor cost $250,000

Actual manufacturing overhead cost $117,000

Actual direct manufacturing labor cost $228,000

Inventory balances on December 31, 2014, were as follows:

Account              Ending balance 2014                  direct manufacturing labor cost in ending balance

Work in process               $ 50,700                                       $ 20,520

Finished goods                 245,050                                          59,280

Cost of goods sold    549,250    148,200

Required: 1. Calculate the predetermined overhead rate.

2. Compute the amount of under- or overapplied manufacturing overhead.

3. Calculate the ending balances in work in process, finished goods, and cost of goods sold if under- or overapplied 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

Explanation / Answer

1 Budgeted manufacturing overhead rate = Budgeted manufacturing overhead cost Budgeted direct manufacturing labor cost = $125,000 $250,000 = 50% of direct manufacturing labor cost 2 Overhead allocated = 50% × Actual direct manufacturing labor cost = 50% × $228,000 = $114,000 Underallocated manufacturing overhead = Actual manufacturing overhead costs Less: Allocated plant overhead costs = $117,000 – $114,000 = $3,000 Underallocated manufacturing overhead = $3,000 3 Since Underallocated Overhead is written off to COGS only, no change will occur to WIP and Finished Goods. Account Dec. 31, 2014 Balance (Before Proration) Proration of $3,000 Underallocated Manuf. Overhead Dec. 31, 2014 Balance (After Proration) (1) (2) (3) = (1) + (2) WIP $                      50,700 $                                 -   $                       50,700 Finished Goods                        245,050                                     -   $                     245,050 Cost of Goods Sold                        549,250                              3,000 $                     552,250 Total $                   845,000 $                          3,000 $                     848,000 4 Underallocated overhead proration based on their ending balances. Account Dec. 31, 2014 Balance (Before Proration) Account Balance as a Percent of Total Proration of $3,000 Underallocated Manuf. Overhead Dec. 31, 2014 Balance (After Proration) (1) (2) = (1) ÷ $845,000 (3) = (2) x $3,000 (4) = (1) + (3) WIP $                      50,700 0.06 180 $                                                                                                 50,880 Finished Goods                        245,050 0.29 870 $                                                                                               245,920 Cost of Goods Sold                        549,250 0.65 1950 $                                                                                               551,200 Total $                   845,000 1 3000 $                                                                                               848,000

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