The adjusted allocation-rate approach restates all overhead entries in the general ledger and subsidiary ledgers using actual overhead cost rates rather than budgeted overhead cost rates. First, the actual manufacturing overhead rate is computed at the end of the fiscal year. Then the manufacturing overhead costs allocated to every job during the year are re-computed using the actual manufacturing overhead rate (rather than the budgeted manufacturing overhead rate). Finally, end-of-year closing entries are made. The result is that at year-end, every job-cost record and finished-goods record—as well as the ending Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold accounts—represent actual manufacturing overhead costs incurred.
The widespread adoption of computerized accounting systems has greatly reduced the cost of using the adjusted allocation-rate approach. In our Robinson example, the actual manufacturing overhead rate ($45 per direct manufacturing labor-hour, see page 116) exceeds the budgeted manufacturing overhead rate ($40 per direct manufacturing labor-hour) by . At year-end, Robinson could increase the manufacturing overhead allocated to each job in 2020 by 12.5% using a single software command. The command would adjust both the subsidiary ledgers and the general ledger.
Consider the Western Pulp and Paper machine job, WPP 298. Under normal costing, the manufacturing overhead cost allocated to the job is $3,520 (the budgeted rate of $40 per direct manufacturing ). Increasing the manufacturing overhead allocated by 12.5%, or , means the adjusted amount of manufacturing overhead cost allocated to Job WPP 298 is . Note from page 116 that using actual costing, manufacturing overhead allocated to this job is $3,960 (the actual rate of $45 per direct manufacturing ). Making this adjustment to normal costing for each job in the subsidiary ledgers ensures that the actual total manufacturing overhead costs of $1,215,000 are allocated to jobs.
The adjusted allocation-rate approach offers the benefits of both the timeliness and convenience of normal costing during the year and the allocation of the entire actual manufacturing overhead costs at year-end. Each individual job-cost record and the end-of-year account balances for inventories and cost of goods sold are adjusted to actual costs. These adjustments, in turn, will affect the income Robinson reports. Knowing the actual profitability of individual jobs after they are completed provides managers with accurate and useful insights for future decisions about which jobs to undertake, how to price them, and how to manage their costs.