Question: Proration of overhead with two indirect cost pools. Adventure Designs makes custom backyard play structures that it sells to dealers across the Midwest. The play structures are produced in two departments, fabrication (a mostly automated department) and custom finishing (a mostly manual department). The company uses a normal-costing system in which overhead in the fabrication department is allocated to jobs on the basis of machine-hours and overhead in the finishing department is allocated to jobs based on direct manufacturing labor-hours. During May, Adventure Designs reported actual overhead of $42,600 in the fabrication department and $39,800 in the finishing department. Additional information follows:
Adventure Designs prorates under- and overallocated overhead monthly to work in process, finished goods, and cost of goods sold based on the ending balance in each account.
1. Calculate the amount of overhead allocated in the fabrication department and the finishing department in May.
2. Calculate the amount of under- or overallocated overhead in each department and in total.
3. How much of the under- or overallocated overhead will be prorated to (a) work-in-process inventory, (b) finished-goods inventory, and (c) cost of goods sold based on the ending balance (before proration) in each of the three accounts? What will be the balance in work-in-process, finished-goods, and cost of goods sold after proration?
4. What would be the effect of writing off under- and overallocated overhead to cost of goods sold? Would it be reasonable for Adventure Designs to change to this simpler method?