What are three possible ways to dispose of underallocated or overallocated overhead costs
at the end of a fiscalyear? Briefly comment on the theoretical correctness or incorrectness
of each method.
Answer: One way to dispose of underallocated or overallocated overhead costs at the end
of a fiscal yearwould be to prorate the underallocated or overallocated overhead costs to
the work-in-process control account,the finished goods control account, and to the cost of
goods sold account based on the relative amounts in eachaccount. This is a theoretically
correct method since it is reasonable to believe that the underallocated oroverallocated
overhead costs should attach themselves to the goods as they are produced. A second way
todispose of the underallocated or overallocated overhead costs at the end of a fiscal year
would be to adjust theallocation rate based on the actual amounts and reallocate the
overhead to completed jobs. This is also atheoretically correct method. A third way is to
clear all underallocated or overallocated overhead to the cost ofgoods sold account. This is
not theoretically valid but it is practical if the amount of underallocated oroverallocated
overhead is not material
1) Compute beginning direct materials inventory.
a. Beginning Inventory + Material Purchase –Ending cost of materials = cost of
goodsmanufactured? + $82000 – $74000 = $30000Therefore: Beginning Inv = $22000
(74000+30000-82000)
2) Compute beginning WIP inventory.a. (96,000/120%=80,000 direct labor costs incurred)
so204,000-74,000-80,000-96,000+69,000=23,000
3) Compute beginning finished goods inventory.a. 149,000-204,000+99,000=44,000
4) Compute actual factory overhead incurred.a. 96,000+8,000=104,000
Budgetary Slack
The book states that a “budgetary Slack is the practice of underestimating budgeted
