Magenta Manufacturing has two pools for applying overhead to products. The first pool contains labor-related overhead costs and is applied at a pre-determined rate of $0.80 per labor dollar. The second pool contains machine-related overhead costs and is applied at a pre-determined rate of $22 per machine hour.
During the year, Magenta used 84,000 machine hours and spent $1,800,000 on direct labor costs for 92,000 hours of labor. Actual labor-related overhead was $1,445,400 and actual machine-related overhead was $1,816,550. Prior to any adjustments for underor overapplied overhead, Magenta's income is $445,280.
Required:
a. Compute Magenta's net income if the firm writes off all under- or overapplied overhead to cost of goods sold.
b. Suppose Magenta chooses to prorate the under- or overapplied overhead to work in process, finished goods, and cost of goods sold in proportion to their ending balances. Would Magenta's reported income be higher or lower than the answer you computed in part (a)?