Before prorating the manufacturing overhead costs at the end of 2008, the Cost of Goods Sold and Finished Goods Inventory had applied overhead costs of $57,500 and $20,000 in them, respectively. There was no Work-in-Process at the beginning or end of 2008. During the year, manufacturing overhead costs of $74,000 were actually incurred. The balance in the Applied Manufacturing Overhead was $77,500 at the end of 2008. If the under or overapplied overhead is prorated between Cost of Goods Sold and the inventory accounts, how much will be allocated to the Finished Goods Inventory?

$903.35 will be allocated to the Finished Goods Inventory

Explanation:

The first step is to determine whether or not the overheads were over - applied or under-applied.

Over-applied = Actual Overheads < Applied Overheads

Under Applied = Actual Overheads > Applied Overheads.

In our case,

Actual Overheads :$74,000  < Applied Overheads :$77,500

Thus overheads were Over-applied

The amount of $3,500 was over-applied

The next step is to establish the Weight of Finished Goods Inventory so as to determine the amount of over-applied overheads to be allocated to it.

Inventory Category                    Cost      Weight     Allocation

Cost of Goods Sold                $57,500     74.19%    $2,596.65

Finished Goods Inventory      $20,000    25.81%        $903.35

Total                                         $77,500     100.00%  $3,500.00

Conclusion :

$903.35 will be allocated to the Finished Goods Inventory

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