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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 4-6Work in process inventoryon 12/31/2014
= $165,0005.From the credit entry to Finished Goods Control T-account, Cost of goods sold (beforeproration) = $880,0006.Manufacturing overheadunderallocated=Debits to ManufacturingOverhead Control– Credit to Manufacturing Overhead Allocated=$514,000 – $464,000=$50,000 underallocated7.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, FinishedGoods, and Cost of Goods Sold. Account balances in each account after proration follows:Account(1)Account Balance(Before Proration)(2)Prorationof$50,000UnderallocatedManufacturing Overhead(3)Account Balance(After Proration)(4) = (2) + (3)Work in Process$ 165,000 (15%)0.15 $50,000 =$ 7,500$ 172,500Finished Goods55,000 ( 5%)0.05 $50,000 =2,50057,500Cost of Goods Sold880,000(80%)0.80 $50,000 =40,000920,000$1,100,000100%$50,000$1,150,0008.Needham’s operating income using write-off to Cost of Goods Sold and Proration based onending balances (before proration) follows:Write-off toProration BasedCost of Goods Soldon Ending BalancesRevenues$1,050,000$1,050,000Cost of goods sold930,000920,000Gross margin120,000130,000Marketing and distribution costs125,000125,000Operating income/(loss)$ (5,000)$ 5,0009.If the purpose is to report the most accurate inventory and cost of goods sold figures, thepreferred method is to prorate based on the manufacturing overhead allocated component in theinventory 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 manufacturingoverhead allocated component if the proportions of direct costs to manufacturing overhead costsare constant in the Work in Process, Finished Goods, and Cost of Goods Sold accounts. Even ifthis is not the case, the prorations based on Work in Process, Finished Goods, and Cost of GoodsSold will better approximate the results if actual cost rates had been used rather than the write-offto Cost of Goods Sold method.Another consideration in Needham’s decision about how to dispose of underallocatedmanufacturing overhead is the effects on operating income. The write-off to Cost of Goods Sold4-7
will lead to an operating loss. Proration based on the balances in Work in Process, FinishedGoods, 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 prorationapproach.4-8