Question: Allocation and proration of overhead. Resource Room prints custom training material for corporations. The business was started January 1, 2017. The company uses a normal-costing system. It has two direct-cost pools, materials and labor, and one indirect-cost pool, overhead. Overhead is charged to printing jobs on the basis of direct labor cost. The following information is available for 2017.
Budgeted direct labor costs $190,000
Budgeted overhead costs $266,000
Costs of actual material used $158,000
Actual direct labor costs $175,000
Actual overhead costs $247,200
There were two jobs in process on December 31, 2017: Job 11 and Job 12. Costs added to each job as of December 31 are as follows:
Direct materials Direct labor
Job 11 $4,720 $5,700
Job 12 $5,090 $6,900
Resource Room has no finished-goods inventories because all printing jobs are transferred to cost of goods sold when completed.
1. Compute the overhead allocation rate.
2. Calculate the balance in ending work in process and cost of goods sold before any adjustments for under- or overallocated overhead.
3. Calculate under- or overallocated overhead.
4. Calculate the ending balances in work in process and cost of goods sold if the under- or overallocated overhead amount is as follows:
a. Written off to cost of goods sold
b. Prorated using the overhead allocated in 2017 (before proration) in the ending balances of cost of goods sold and work-in-process control accounts
5. Which of the methods in requirement 4 would you choose? Explain.