Which of the following about using proration to dispose of underapplied or overapplied overhead is correct?

A) Proration is a less accurate method than closing the account to COGS, because it arbitrarily allocates overhead between the COGS account, WIP account, and finished goods account.
B) Proration is a less accurate method than closing the account to COGS, because the process affects three accounts rather than just one account.
C) Proration is a more accurate method than closing the account to COGS, because it recognises that over/under estimation of overhead rate affects more than just the COGS account.
D) Proration is a more accurate method than closing the account to COGS, because the potential distortion is spread out over three accounts.

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Marian Mikhail · Accepted Answer

Final Answer : C, Explanation :  Proration is a more accurate method than closing the account to COGS because it recognises that over/under estimation of overhead rate affects more than just the COGS account. Proration spreads the potential distortion over three accounts (COGS, WIP, and finished goods) in proportion to the amount of overhead applied to each account. This results in a more accurate allocation of costs and a better representation of the true cost of goods sold. Option A and B are incorrect because proration is actually a more accurate method than closing the account to COGS, and it does not arbitrarily allocate overhead between accounts. Option D is partly correct, but it fails to explain why proration is more accurate than closing the account to COGS.

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