A computer manufacturer has the following account balances at the end of the year.

These accounts contain €800,000 of allocated overhead. Actual overhead, however, is €1,000,000.

a. What are the account balances after prorating the under-absorbed overhead?

b. If the manufacturing manager’s performance bonus is based on earnings, what is the effect of proration on the manager’s bonus?

c. If the manager had the discretion to prorate the under-absorbed overhead, or to write it off to the Cost of Goods Sold account, which choice would the manager prefer?

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Work-in-Process Finished goods Cost of Goods Sold Total 100,000 800,000 2,000,000 2,900,000