Dawn Manufacturing produces industrial light fixtures.For the year,management estimated that total manufacturing overhead would be $1,120,000.Management decided to use direct labor hours to apply manufacturing overhead and budgeted 144,600 direct labor hours.The following information was compiled before an adjustment had been made to close Manufacturing Overhead Control: For the year,manufacturing overhead was overapplied by $340,000.If Dawn prorates the overapplied overhead,what is the ending balance of Cost of Goods Sold?

Question

Dawn Manufacturing produces industrial light fixtures.For the year,management estimated that total manufacturing overhead would be $1,120,000.Management decided to use direct labor hours to apply manufacturing overhead and budgeted 144,600 direct labor hours.The following information was compiled before an adjustment had been made to close Manufacturing Overhead Control:  For the year,manufacturing overhead was overapplied by $340,000.If Dawn prorates the overapplied overhead,what is the ending balance of Cost of Goods Sold?

Quizplus · Accepted Answer

To find the ending balance of Cost of Goods Sold, we need to adjust for the overapplied overhead. If Dawn prorates the overapplied overhead using the following formula: 
Proration rate = Actual overhead / Applied overhead
Proration rate = (Actual overhead - Overapplied overhead) / Applied overhead
Proration rate = ($1,120,000 - $340,000) / ($144,600 x $10) = $780,000 / $1,446,000 = 0.5392

The adjustment for Cost of Goods Sold is:
Overapplied overhead x Proration rate = $340,000 x 0.5392 = $183,288
Thus, the ending balance of Cost of Goods Sold would be:
Cost of Goods Sold = Cost of Goods Manufactured + Beginning finished goods inventory - Ending finished goods inventory
Cost of Goods Sold = ($2,857,000 + $183,288) - $100,000 = $2,940,288
Therefore, the best choice is B.

Dawn Manufacturing Produces Industrial Light Fixtures