From the debit entry to Finished Goods T-account,
Cost of jobs completed and transferred from WIP
= $925,000
4.
From Work-in-Process T-account,
= $44,000 + $234,000 + $348,000 + $464,000 –$925,000
4-6
Work in process inventory
on 12/31/2014
= $165,000
5.
From the credit entry to Finished Goods Control T-account, Cost of goods sold (before
proration) = $880,000
6.
Manufacturing overhead
underallocated
=
Debits to Manufacturing
Overhead Control
–
Credit to Manufacturing
Overhead Allocated
=
$514,000 – $464,000
=
$50,000 underallocated
7.
a.
Write-off to Cost of Goods Sold will increase (debit) Cost of Goods Sold by $50,000.
Hence, Cost of Goods Sold = $880,000 + $50,000 = $930,000.
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
$50,000
Underallocated
Manufacturing Overhead
(3)
Account Balance
(After Proration)
(4) = (2) + (3)
Work in Process
$
165,000
(15%)
0.15
$50,000 =
$
7,500
$
172,500
Finished Goods
55,000
(
5%)
0.05
$50,000 =
2,500
57,500
Cost of Goods Sold
880,000
(80
%
)
0.80
$50,000 =
40,000
920,000
$1,100,000
100
%
$50,000
$1,150,000
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 Sold
on Ending Balances
Revenues
$1,050,000
$1,050,000
Cost of goods sold
930,000
920,000
Gross margin
120,000
130,000
Marketing and distribution costs
125,000
125,000
Operating income/(loss)
$
(5,000
)
$
5,000
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
4-7
will lead to an operating loss. Proration based on the balances in Work in Process, Finished
Goods, and Cost of Goods Sold will help Needham 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.
4-8
