From the debit entry to Finished Goods T account Cost of jobs completed and

From the debit entry to finished goods t account cost

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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
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= $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
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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
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