Ending balances before proration follows write off to

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ending balances (before proration) follows: Write-off to Proration Based Cost of Goods on Ending Sold Balances Revenues $1,308,000 $1,308,000 Cost of goods sold 1,152,000 1,131,840 Gross margin 156,000 176,160 Marketing and distribution costs 168,000 168,000 Operating income/(loss) $ (12,000 ) $ 8,160 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.
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4-36 Another consideration in Ashers’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 to an operating loss. Proration based on the balances in Work in Process, Finished Goods, and Cost of Goods Sold will help Asher avoid the loss and show an operating income. The main merit of the write-off to Cost of Goods Sold method is its simplicity. However, accuracy and the effect on operating income favor the preferred and recommended proration approach. 4-38 (40 55 min.) Overview of general ledger relationships. 1. & 3. An effective approach to this problem is to draw T-accounts and insert all the known figures. Then, working with T-account relationships, solve for the unknown figures (here coded by the letter X for beginning inventory figures and Y for ending inventory figures). Materials Control X Purchases 15,000 85,000 (1) 70,000 100,000 70,000 Y 30,000 Work-in-Process Control X (1) DM 70,000 (2) DL 150,000 (3) Overhead 90,000 10,000 310,000 (4) 305,000 (a) (c) 320,000 5,000 3,000 305,000 Y 23,000 Finished Goods Control X (4) 20,000 305,000 (5) 300,000 325,000 300,000 Y 25,000 Cost of Goods Sold (5) 300,000 (d) 6,000 Manufacturing Department Overhead Control (a) (b) 85,000 1,000 1,000 (d) 87,000
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4-37 Manufacturing Overhead Allocated (d) 93,000 (3) (c) 90,000 3,000 Manufacturing overhead cost rate = $90,000 ÷ $150,000 = 60% Wages Payable Control (a) 6,000 Various Accounts (b) 1,000 2. Adjusting and closing entries: (a) Work-in-Process Control 5,000 Manufacturing Department Overhead Control 1,000 Wages Payable Control 6,000 To recognize payroll costs (b) Manufacturing Department Overhead Control 1,000 Various accounts 1,000 To recognize miscellaneous manufacturing overhead (c) Work-in-Process Control 3,000 Manufacturing Overhead Allocated 3,000 To allocate manufacturing overhead Note : Students tend to forget entry (c) entirely. Stress that a budgeted overhead allocation rate is used consistently throughout the year. This point is a major feature of this problem.
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