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?

a. Job 5 would be allocated another $2,500 of cost
b. Job 6 would be allocated another $4,000 of cost
c. Cost of goods sold would be reduced by $3,300
d. Cost of goods sold would be increase by $10,000

Cost of goods sold should be Increased by $4,000

Explanation:

Overhead allocated to Job 5 = $8,000

Overhead allocated to Job 6 = $10,000

Overhead allocated to cost of goods sold = 40,000 x 30%

= $12,000

Total overhead allocated = Overhead allocated to Job 5 + Overhead allocated to Job 6 + Overhead allocated to cost of goods sold

= 8,000 + 10,000 + 12,000

= $30,000

Overhead allocation percentage of Job 5 = Overhead allocated to Job 5/Total overhead allocated

= 8,000/30,000

= 26.7%

Overhead allocation percentage of job 6 = Overhead allocated to Job 6/Total overhead allocated

= 10,000/30,000

= 33.3%

Overhead allocation percentage of Cost of goods sold = Overhead allocated to cost of goods sold/Total overhead allocated

= 12,000/30,000

= 40%

Under allocated overhead = $10,000

Thus, Under allocated overhead to be allocated to cost of goods sold = Under allocated overhead x Overhead allocation percentage of cost of goods sold

= 10,000 x 40%

= $4,000

Thus, Cost of goods sold should be Increased by $4,000

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