Ti-Enne Srl uses a normal costing system with a single manufacturing overhead cost pool and machine-hours as the allocation base. The following data are for 2015:
Budgeted manufacturing overhead............€4 800 000
Overhead allocation base....................Machine-hours
Budgeted machine-hours.............................80 000
Manufacturing overhead incurred.............€4 900 000
Actual machine-hours................................75 000
Machine-hours data and the closing balances (before proration of underallocated or overallocated overhead) are as follows:
Actual machine-hours 2015 end-of-year balance
Cost of Goods Sold...................................60 000........................€8 000 000
Finished Goods.......................................11 000........................€1 250 000
Work in Progress.......................................4 000...........................€750 000
Required
1. Calculate the budgeted manufacturing overhead rate for 2015.
2. Calculate the under- or overallocated manufacturing overhead of Ti-Enne in 2015. Prorate this under- or overallocated amount using:
a. Immediate write-off to Cost of Goods Sold
b. Proration based on closing balances (before proration) in Work in Progress, Finished Goods and Cost of Goods Sold
c. Proration based on the allocated overhead amount (before proration) in the closing balances of Work in Progress, Finished Goods and Cost of Goods Sold.
3. Which proration method do you prefer in requirement 2? Explain.