Premier Golf Carts Makes Custom Golf Carts That It Sells to Dealers Across the Southeast

Premier Golf Carts makes custom golf carts that it sells to dealers across the Southeast. The carts 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 labor-hours. During May, Premier Golf Carts reported actual overhead of $49,500 in the fabrication department and $22,200 in the finishing department. Additional information follows: Manufacturing overhead rate (fabrication department) Manufacturing overhead rate (finishing department) Machine-hours (fabrication department) for May Direct labor-hours (finishing department) for May Work in process inventory, May 31 Finished goods inventory, May 31 Cost of goods sold, May $20 per machine-hour $16 per direct labor-hour 2,000 machine-hours 1,200 labor-hours $50,000 $150,000 $300,000 Premier Golf Carts 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. Required: 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 Premier Golf Carts to change to this simpler method? SOLUTION (15 min.) Proration of overhead with two indirect cost pools. 1. Fabrication department: Overhead allocated = $20 per machine-hour × 2,000 machine-hours = $40,000 Finishing department: Overhead allocated = $16 per direct labor-hour × 1,200 direct labor-hours = $19,200 2. Under- or overallocated overhead in each department and in total follows: Fabrication department: $49,500 actual overhead – $40,000 allocated = $9,500 underallocated Finishing department: $22,200 actual overhead – $19,200 allocated = $3,000 underallocated Total underallocated overhead = $9,500 + $3,000 = $12,500 3. Underallocated overhead prorated based on ending balances Account Work in Process Finished Goods Cost of Goods Sold Account Balance (Before Proration) (1) $ 50,000 150,000 300,000 Account Balance as a Percent of Total (2) = (1) ÷ $500,000 0.10 0.30 0.60 Proration of $12,500 Underallocated Overhead (3) = (2) × 12,500 0.10 × $12,500 =$ 1,250 0.30 × $12,500 = 3,750 0.60 × $12,500 = 7,500 Account Balance (After Proration) (4) = (1) + (3) $ 51,250 153,750 307,500 $12,50 Total $500,000 1.00 0 $512,500 Because Premier Golf Carts is disposing of underallocated costs based on the ending balance in Work in Process, Finished Goods, and Cost of Goods Sold accounts, it does not have to allocate the underallocated overhead from each department separately. Had Premier Golf Carts disposed of the underallocated overhead based on the overhead allocated in the ending balances in each of the three accounts, it would have to dispose of the underallocated overhead in the Fabrication Department and the underallocated overhead in the Finishing Department separately. 4. The ending balance in Cost of Goods Sold would be $312,500 instead of $307,500 if the entire $12,500 amount of underallocated overhead was written off to Cost of Goods Sold account. Cost of Goods Sold would increase by 1.6% ($312,500 – $307,500) ÷ $307,500. Because this is an insignificant amount, it would be reasonable to use the simpler method of charging off to Cost of Goods Sold.