It was the end of the fiscal year, and Bria was looking at the MOH situation. Since her company uses normal costing, she anticipated a difference in the amount of MOH that was applied compared to the amount that was actually incurred. Indeed, there was a difference - and it seemed huge! Here is what she saw within the MOH account, as well as detail from the beginning of the year when the budgeted MOH rate was determined:

Budgeted MOH cost

$30,000

Budgeted direct labor hours

20,000 hours

Actual MOH cost

$31,000

Actual direct labor hours

18,000 hours

Bria is aware of the following company policy regarding any MOH difference: "any MOH difference that was deemed 'immaterial' should be written off in the current period; any MOH difference that was deemed 'material' should be prorated to the appropriate accounts so as to better approximate actual costs."

Bria also has the following additional detail regarding the inventory accounts.

Ending Bal.

Applied MOH within End. Bal.

Direct Materials Inventory

$5,000

-

Work in Process Inventory

5,000

$2,000

Finished Goods Inventory

15,000

5,000

Cost of Goods Sold

80,000

20,000

While she does not yet have a clear understanding of what amount might be considered "material" yet, Bria knows she has to first calculate the MOH difference.

Required:

a.Calculate the budgeted MOH rate for Bria's company.

b.Determine whether the MOH is under- or overapplied, and by how much.

c.Since Bria is unsure if this amount would be considered material or not, she decides to do the work for both options so that she can bring it to her supervisor and ask for additional clarification regarding materiality. (For the following, round any rates or proportions to four decimal places, and round final dollar amounts to the nearest dollar.)

1.Show the journal entry if the MOH difference is to be written off entirely in the current period.

2.Show the calculations and journal entry needed if the difference is to be prorated to the appropriate inventory and cost accounts based on their ending balances.

3.Show the calculations and journal entry needed if the difference is to be prorated to the appropriate inventory and cost accounts based on the amount of applied MOH in each account.

d.After going to her supervisor with the above work, Bria finds out that the company considers an MOH difference to be "material" if it is greater than 5% of the actual MOH cost for that period (anything less is considered immaterial). Based on this threshold, which of the above options should Bria use this year? Explain the advantages and disadvantages of each option.