Malcolm Manufacturing has two pools for applying overhead to products. The first pool contains labor-related overhead costs and is charged out at $.80 per labor dollar. The second pool contains machine-related overhead costs and is charged out at $22 per machine hour.
During the year, Malcolm spent $1,800,000 on 92,000 hours of labor and used 84,000 machine hours. Actual labor-related overhead was $1,445,400 and actual machine related overhead was $1,816,550. Prior to any adjustments for under or overapplied overhead, Malcolm's income is $445,280.
REQUIRED:
a. Compute Malcolm's net income if the firm writes off all under of overapplied overhead to cost of goods sold.
b. Suppose Malcolm 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 Malcolm's reported income be higher or lower than the answer you computed in part (a)?