ABC Manufacturing Inc. ends the month with two jobs still in progress. Job 5 has $10,000 of materials, $2,000 of direct labor and $8,000 of manufacturing overhead allocated. Job 6 was $30,000 of materials, $2,000 of direct labor and $10,000 of manufacturing overhead allocated. The cost of goods sold for the month was $40,000 and of that 30% was overhead. There were no finished goods in stock as the month ends. If the manufacturing overhead is underallocated by $10,000, which of the following choices would be the correct way to prorate it, assuming the proration is based on the allocated overhead in the ending balances of work-in-process, finished goods, and cost of goods sold?

Question

Quizplus · Accepted Answer

To prorate the underallocated manufacturing overhead, we need to calculate the proportion of allocated overhead in the ending balances of WIP, finished goods, and cost of goods sold. 
Total allocated overhead = $8,000 (Job 5) + $10,000 (Job 6) + 30% ($40,000 COGS) 
= $8,000 + $10,000 + $12,000 
= $30,000

The proportion of allocated overhead in the ending balances is: 
Job 5: $8,000/$30,000 = 26.67% 
Job 6: $10,000/$30,000 = 33.33% 
COGS: $12,000/$30,000 = 40%

To prorate the underallocated overhead, we multiply $10,000 by the respective proportions: 
Job 5: 26.67% x $10,000 = $2,667 
Job 6: 33.33% x $10,000 = $3,333 
COGS: 40% x $10,000 = $4,000

Therefore, Job 6 should be allocated another $3,333 of cost. Option B is correct.