Q3.The Zaf 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
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 over-allocated
overhead) are as follows:
Actual material Hours 2011 end of year balance
Cost of goods sold......... 60000.....8000000
Work in process....... 11000........1250000
Finished goods.......... 4000.......750000
Required:
1. Compute the budgeted manufacturing overhead rate for 2011.
2. Compute the under- or over-allocated manufacturing overhead of Zaf Radiator in 2011.
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 2011 (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.
1. Budgeted manufacturing overhead rate for 2011:
Budgeted manufacturing overhead rate = Budgeted manufacturing overhead costs / Budgeted machine-hours
Budgeted manufacturing overhead rate = $4,800,000 / 80,000 machine-hours
Budgeted manufacturing overhead rate = $60 per machine-hour
2. Under- or over-allocated manufacturing overhead in 2011:
Actual manufacturing overhead costs - (Budgeted manufacturing overhead rate x Actual machine-hours)
$4,900,000 - ($60 x 75,000)
$4,900,000 - $4,500,000
=$400,000 under-allocated
3. Disposal methods:
a. Write-off to Cost of Goods Sold: This method involves writing off the entire under- or over-allocated amount to the Cost of Goods Sold account. This method helps to correct the income statement for the actual manufacturing overhead costs incurred.
b. Proration based on ending balances: This method involves allocating the under- or over-allocated amount based on the ending balances in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold accounts. This method ensures that the impact of the under- or over-allocation is distributed across different stages of production.
c. Proration based on overhead allocated: This method involves allocating the under- or over-allocated amount based on the overhead allocated in 2011. This method ensures that the under- or over-allocation is proportional to the overhead costs incurred during the period.
I prefer the proration based on ending balances method in requirement 2 because it distributes the impact of the under- or over-allocation across different stages of production, reflecting a more accurate representation of the costs incurred at each stage. It also helps to avoid distorting the ending balances in the financial statements.