Underallocated overhead prorated based on ending balances PDF

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Underallocated overhead prorated based on ending balances (before proration) in JIP and CCJ

Account JIP CCJ

4c.

Account JIP CCJ

May 31, 2017 Balance (Before Proration) (1) $ 151,000 99,000 $ 250,000

Account Balance as a Percent of Total In JIP and CCJ (2) = (1) ÷ $250,000 0.604 0.396 1.000

Proration of $5,000 Underallocated Overhead (3) = (2) $5,000 0.604 $5,000 = $3,020 0.396 $5,000 = 1,980 $5,000

May 31, 2017 Balance (After Proration) (4) = (1) + (3) $154,020 100,980 $255,000

Underallocated overhead prorated based on May overhead in ending balances May 31, 2017 Balance (Before Proration) (1) $151,000 99,000 $250,000

Overhead Allocated in May Included in May 31, 2017 Balance (2) $ 84,600 32,400 $117,000

Overhead Allocated in May Included in May 31, 2017 as a Percent of Total (3) = (2) ÷ $117,000 0.723 0.277 1.000

Proration of $5,000 Underallocated Overhead (4) = (3) $5,000 0.723 $5,000 = $3,615 0.277 $5,000 = 1,385 $5,000

May 31, 2017 Balance (After Proration) (5) = (1) + (4) $154,615 100,385 $255,000

5. I would choose the method in 4c (proration based on overhead allocated) because this method results in account balances based on actual overhead allocation rates. The account balances before proration in JIP is much larger than CCJ, and underallocated overhead is material as a percentage of CCJ. Of course, the method chosen affects reported operating income. In the case of underallocated overhead, writing off to CCJ results in lower operating income compared to proration and lower taxes. If overhead had been overallocated, proration would result in lower operating income and lower taxes. Despite the tax considerations, I would choose proration based on overhead allocated because it best represents Market Pulse’s performance during a period. I would use the simpler method of write off to CCJ only if the amount were immaterial to CCJ or if it represents inefficiency. I would apply this method consistently from period to period.

Try It 4-1 Solution The solution assumes that Donna Corporation allocates manufacturing overhead costs in its normal costing system based on direct manufacturing labor-hours.

Budgeted indirect Budgeted annual manufacturing overhead costs  cost rate Budgeted annual quantity of the cost-allocation base

Budgeted indirect cost rate

$960,000  = $30 per direct manufacturing labor hour 32,000 hours

Total manufacturing costs of the 32 Berndale Drive job equals: Direct manufacturing costs Direct materials Direct manufacturing labor ($20 per direct manufacturing labor hour × 160 direct manufacturing labor-hours)

$3,500 3,200

$ 6,700

Manufacturing overhead costs ($30 per direct manufacturing labor-hour  160 hours) Total manufacturing costs of 32 Berndale Drive job

4,800 $11,500...