Glavine Corporation manufactures precision equipment made to order for the semiconductor industry. Glavine uses two manufacturing overhead cost pools—one for the overhead costs incurred in its highly automated Machining Department and another for overhead costs incurred in its labour-based Assembly Department. Glavine uses a normal costing system. It allocates Machining Department overhead costs to jobs based on actual machinehours using a budgeted machine-hour overhead rate. It allocates Assembly Department overhead costs to jobs based on actual direct manufacturing labour-hours using a budgeted direct manufacturing labour-hour rate.
The following data are for the year 2016:
Machining Assembly
Department Department
Budgeted overhead…………………………………………$5,850,000…………...$7,812,000
Budgeted machine-hours (MH)………………………………….90,000……………………..0
Budgeted direct manufacturing labour-hours (DMLH)……………….0……………...124,000
Actual manufacturing overhead costs……………………….$5,470,000………….$8,234,000
Machine-hours and direct manufacturing labour-hours and the ending balances (before proration of under allocated overhead) are as follows:
Required
1. Compute the budgeted overhead rates for the year in the Machining and Assembly Departments.
2. Compute the under allocated or over allocated overhead in each department for the year. Dispose of the under allocated or over allocated amount in each department using:
a. Immediate write-off to Cost of Goods Sold.
b. Proration based on ending balances (before proration) in Cost of Goods Sold, Finished Goods, and Work-in-Process.
c. Proration based on the allocated overhead amount (before proration) in the ending balances of Cost of Goods Sold, Finished Goods, and Work-in-Process.
3. Which disposition method do you prefer in requirement 2? Explain.
SOLUTION
1.
=
= $5,850,000 ÷ 90,000
= $65 per machine-hour
=
= $7,812,000 ÷ 124,000
= $63 per direct manufacturing labour-hour
2. Machining Department
Total actual machine-hours = 69,000 + 6,900 + 16,100 = 92,000 machine-hours
= 92,000 $65 = $5,980,000
Over/Underallocated MOH = –
= $5,470,000 – $5,980,000
= $510,000 OVERALLOCATED
Assembly Department
= 83,200 + 12,800 + 32,000 = 128,000
= 128,000 $63 = $8,064,000
Over/Underallocated MOH = –
= $8,234,000 – $8,064,000
= $170,000 UNDERALLOCATED
Write-off to Cost of Goods Sold leads to
(i) lower Cost of Goods Sold of $510,000 as a result of overallocation of manufacturing overhead in the Machining Department
(ii) higher Cost of Goods Sold of $170,000 as a result of underallocation of manufacturing overhead in the Assembly Department. Hence,
Cost of Goods Sold = $21,600,000 – $510,000 + $170,000 = $21,260,000
b. Proration based on ending balances (before proration) in Work in Process, Finished Goods, and Cost of Goods Sold.
Account balances in each account after proration follows:
| Account (1) | Account Balance (2) | Proration of ($510,000) Overallocated Overhead in Machining Dept. (3) | Proration of $170,000 Underallocated Overhead in Assembly Dept. (4) | Account Balance (after Proration) (5) = (2) + (3) + (4) |
|---|
| Work in Process | $7,600,000 (23.75%) | 0.2375 ($510,000) =($121,125) | 0.2375 $170,000 = $40,375 | $7,519,250 |
| Finished Goods | 2,800,000 (8.75%) | 0.0875 ($510,000) = ($44,625) | 0.0875 $170,000 = $14,875 | $2,770,250 |
| Cost of Goods Sold | 21,600,000 (67.50%) | 0.675 ($510,000) =($344,250) | 0.675 $170,000 = $114,750 | $21,370,500 |
| (32,000,000) | ($510,000) | $170,000 | $31,660,000 |
| c. | Proration based on the overhead allocated (before proration) in the ending balances of Cost of Goods Sold, Finished Goods, and Work in Process for each Department follows. | | | |
| | Machining Department | | |
| | Overhead Costs Allocated to Each | | |
| | Account in Machining Department | Proration of ($510,000) | |
| | Using Budgeted Machine-Hour Rate | Overallocated | |
| Account | Actual Machine-hours | Overhead | |
| (1) | (2) | (3) | |
| Work in process $6516,100 = $1,046,500 | (17.5%) | 0.175 ($510,000) | = | ($89,250) |
| Finished goods $656,900 = 448,500 | (7.5%) | 0.075 ($510,000) | = | ($38,250) |
| Cost of goods sold $6569,000 = 4,485,000 | (75.0%) | 0.75 ($510,000) | = | ($382,500) |
| $5,980,000 | 100% | | | ($510,000) |
| Assembly Department | | | |
| | Overhead Costs Allocated to Each | | |
| | Account in Assembly Department | | |
| | Using Budgeted Direct Manuf. | Proration of $170,000 | |
| | Labour-hour Rate Actual Direct | Underallocated Assembly | |
| Account Manuf. Labour-hours | Overhead | (1) | (2) | (3) |
| Work in process $6332,000 = $2,016,000 | (25%) | 0.25 $170,000 | = | $42,500 |
| Finished goods $6312,800 = 806,400 | (10%) | 0.10 $170,000 | = | 17,000 |
| Cost of goods sold $6383,200 = 5,241,600 | (65%) | 0.65 $170,000 | = | 110,500 |
| $8,064,000 | (100%) | | | $170,000 |
Account balances in each account after proration of overallocated Machining Department costs and underallocated Assembly Department costs follow.
Prorated Prorated
($510,000) of $170,000 of
Overallocated Underallocated
Machining Assembly
Department Department
Account Overhead Overhead Account
Balance (before) (calculated (calculated Balance (after
Account Proration) earlier) earlier) Proration)
(1) (2) (3) (4) (5)=(2)+(3)+(4)
Work in process $ 7,600,000 $ (89,250) $ 42,500 $ 7,553,250
Finished goods 2,800,000 (38,250) 17,000 2,778,750
Cost of goods sold 21,600,000 (382,500) 110,500 21,328,000
$32,000,000 $(510,000) $170,000 $31,660,000
3. If the purpose is to report the most accurate inventory and cost of goods sold figures, the preferred method is to prorate based on the manufacturing overhead allocated amount in the inventory and cost of goods sold accounts (as in requirement 2c). Note, however, that prorating based on ending balances in Work in Process, Finished Goods, and Cost of Goods Sold (as in requirement 2b) yields a close approximation to the more accurate proration in requirement 2c. Also note that the write-off to Cost of Goods Sold method (as in requirement 2a) results in a difference of only $68,000 ($21,328,000 – $21,260,000) or less than 1% to the balance of Cost of Goods Sold. Furthermore, the Write Off to Cost of Goods Sold method is simpler than the other methods. Depending on the objectives of the disposal of over/underallocation, a manager may prefer any one of the methods over the other two.