9 Proration of overhead. (Z. lqbal, adapted) The Zaf Radiator Company uses a nor

Question

9 Proration of overhead. (Z. lqbal, adapted) The Zaf Radiator Company uses a normal-costing system a single manufacturing overhead cost pool and machine-hours as the cost-allocation base. The fol- lowing data are for 2017 Budgeted manufacturing overhead costs Overhead allocation base Budgeted machine-hours Manufacturing overhead costs incurred Actual machine-hours $4,800,000 Machine-hours 80,000 $4,900,000 75,000 Machine-hours data and the ending balances (before proration of under or overallocated overhead) are as follows: Actual Machine-Hours 60,000 11,000 4,000 2017 End-of-Year Balance $8,000,000 1,250,000 750,000 Cost of Goods Sold Finished Goods Control Work-in-Process Control

Explanation / Answer

1) Budgeted overhead rate budgeted manufacturing overhead/budgeted machine hours 4,800,000/80,000 60 per machine hour budgeted manufacturing overhead rate = $60 per hour 2) Actual overhead 4,900,000 Applied overhead (75000*60) 4500000 overhead under applied 400,000 a) the overhead under applied will be simply charged to cost of goods sold Journal entry Account titles & Explanations Debit Credit Cost of goods sold 400,000 manufacturing overhead 400,000 b) proration rate based on ending balances year end % Amount overhead balances allocated Cost of goods sold 8,000,000 80.00% 400,000 320,000 finished goods Control 1,250,000 12.50% 400,000 50000 Work in process control 750,000 7.50% 400,000 30000 total 10,000,000 400,000 c) proration on the basis of overhead allocated overhead Machine overhead underapplied rate hours allocated % Amount overhead allocated Cost of goods sold 60 60,000 3600000 80.00% 400,000 320,000 finished goods Control 60 11,000 660000 14.67% 400,000 58667 Work in process control 60 4,000 240000 5.33% 400,000 21333 total 4500000 400,000 3) the method C is to be preferred as it is based on actual hours

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