Question

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 for 2014:

Budgeted manufacturing overhead cost $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-hour data and the ending balances(before proration of under or over allocated overhead) are as follows:
Costs of goods sold: actual machine hours-60,000 & end of year balance for 2014 $8,000,000
Finished goods control: actual machine hours- 11,000 & end of year balance 1,250,000
Work in process control: actual machine hours 4,000 & 750,000 for end of year balance for 2014
1. Compute the budgeted manufacturing overhead rate for 2014
2. Compute the under or over allocated manufacturing overhead of Zaf radiator in 2014. Dispose of this amount using the following:
A. Write off to costs of goods sold
B. Proration based on ending balances (before proration) in work-in-process control, finished goods control and costs of goods soldC. Proration based on the overhead allocated in 2014 (before proration) in the ending balances of Work-in-process control, finished goods control, and cost of goods sold
3. Which method is preferred in requirement 2? Why?

Answer 1

1. $ 60.00 per machine hour

2. A = $400,000 B= $30,000 , $50,000 , $350,000 (respectively)

3. Most preferred is A , because the full over/ under allocation is accounted for in the income statement.

Step-by-step explanation:

Budgeted manufacturing overhead rate = Budgeted Overheads / Budgeted Activity

= $4,800,000 / 80,000

= $ 60.00 per machine hour

Over-allocation = Actual Manufacturing Overheads < Applied Manufacturing Overheads

Under-allocation = Actual Manufacturing Overheads > Applied Manufacturing Overheads

thus,

Applied Manufacturing Overheads = Actual Activity × Budgeted manufacturing overhead rate

= 75,000 machine hours × $ 60.00

= $4,500,000

therefore,

Actual Manufacturing Overheads = $4,900,000

Applied Manufacturing Overheads = $4,500,000

conclusion :

Actual Manufacturing Overheads : $4,900,000 > Applied Manufacturing Overheads : $4,500,000

We have an under-allocation situation

Amount of under-allocated overheads = $4,900,000 - $4,500,000 = $400,000

A. Cost written off to cost of goods sold is $400,000

B.

Inventory Category Total Weight Cost Allocation

work-in-process control, $750,000 7.50% $30,000

finished goods control and $1,250,000 12.50% $50,000

costs of goods sold $8,000,000 80.00% $320,000

Total $10,000,000 100.00% $400,000

3. Most preferred is A , because the full over/ under allocation is accounted for in the income statement.