Cost Accoutning

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Cost accounting 4-37 General ledger relationships, under- and overallocation. The solution assumes all materials used are direct materials. A summary of the T-accounts for Needham Company before adjusting for under- or overallocation of overhead follows: Direct Materials Control Work-in-Process Control

1-1-2008 30,000
Purchases 400,000
Material used for
manufacturing 380,000
1-1-2008 20,000
Direct materials 380,000
Transferred to
finished goods 940,000
12-31-2008 50,000 Direct manuf.
Labor 360,000
Manuf. overhead
allocated 480,000
12-31-2008 300,000
Finished Goods Control Cost of Goods Sold
1-1-2008 10,000
Transferred in
from WIP 940,000
Cost of goods
sold 900,000
Finished goods
sold 900,000
12-31-2008 50,000
Manufacturing Overhead Control Manufacturing Overhead Allocated Manufacturing
overhead
costs 540,000
Manufacturing
overhead
allocated to
work in
process 480,000
1. From Direct Materials Control T-account,
Direct materials issued to production = $380,000 that appears as a credit. 2. Direct manufacturing labor-hours =
Direct manufacturing labor costs
Direct manufacturing wage rate per hour
=
$360,
$15 per ho
000
ur
= 24,000 hours
Manufacturing overhead
allocated = Direct manufacturing
labor hours × Manufacturing
overhead rate
= 24,000 hours × $20 per hour = $480,000
3. From the debit entry to Finished Goods T-account,
Cost of jobs completed and transferred from WIP = $940,000
4. From Work-in-Process T-account,
Work in process inventory
on 12/31/2008 = $20,000 + $380,000 + $360,000 + $480,000 – $940,000 = $300,000
5. From the credit entry to Finished Goods Control T-account, Cost of goods sold (before proration) = $900,000
6.
Manufacturing overhead
underallocated =
Debits to Manufacturing
Overhead Control –
Credit to Manufacturing
Overhead Allocated
= $540,000 – $480,000
= $60,000 underallocated
7. a. Write-off to Cost of Goods Sold will increase (debit) Cost of Goods Sold by $60,000. Hence, Cost of Goods Sold = $900,000 + $60,000 = $960,000.
b. Proration based on ending balances (before proration) in Work in Process, Finished Goods, and Cost of Goods Sold.
Account balances in each account after proration follows:
Account
(1)
Account Balance
(Before Proration)
(2)
Proration of $60,000
Underallocated
Manufacturing Overhead
(3)
Account Balance
(After Proration)
(4)=(2)+(3)
Work in Process $ 300,000 (24%) 0.24 × $60,000 = $14,400 $ 314,400 Finished Goods 50,000 ( 4%) 0.04 × $60,000 = 2,400 52,400
Cost of Goods Sold 900,000 (72%) 0.72 × $60,000 = 43,200 943,200 $1,250,000 100% $60,000 $1,310,000
8. Needham’s operating income using write-off to Cost of Goods Sold and Proration based on ending balances (before proration) follows:
Write-off to Proration Based
Cost of Goods on Ending
Sold Balances
Revenues $1,090,000 $1,090,000
Cost of goods sold 960,000 943,200
Gross margin 130,000 146,800
Marketing and distribution costs 140,000 140,000
Operating income/(loss) $ (10,000) $ 6,800
9. If the purpose is to report the most accurate inventory and cost of goods sold figures, the preferred method is to prorate based on the manufacturing overhead allocated component in the inventory and cost of goods sold accounts. Proration based on the balances in Work in Process, Finished Goods, and Cost of Goods Sold will equal the proration based on the manufacturing overhead allocated component if the proportions of direct costs to manufacturing overhead costs are constant in the Work in Process, Finished Goods and Cost of Goods Sold accounts. Even if this is not the case, the prorations based on Work in Process, Finished Goods, and Cost of Goods Sold will better approximate the results if actual cost rates had been used rather than the write-off to Cost of Goods Sold method.

Another consideration in Needham’s decision about how to dispose of underallocated manufacturing overhead is the effects on operating income. The write-off to Cost of Goods Sold will lead...
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