A custom furniture manufacturer uses direct labor to allocate overhead. At the end of the year, the company had the following account balances with and without allocated overhead.

Actual overhead during the year was $80,000. Estimated and actual direct labor hours are equal.

a. What are the ending account balances, if the Cost of Goods Sold account is adjusted for the over- or under-absorbed overhead?

b. What are the ending account balances, if the over- or under-absorbed overhead is prorated?

c. What are the ending account balances, if the application rate is recalculated to reflect actual overhead costs?

d. If the manager’s performance is evaluated, in part, in terms of net profit, which method to adjust for the over- or under-absorbed overhead would the manager prefer? Explain your answer.

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Direct Direct Labor Account Work-in-Process Costs Hours Allocated Overhead $ 10,000 100 $ 5,000 Finished Goods 40,000 300 15,000 Cost of Goods Sold 200,000 1,600 80,000 Ending Balance $ 15,000 55,000 280,000 Totals $250,000 2,000 $100,000 $350,000