Allocatin and proration of overhead.
Frankin & Son Printing designed and prointed alses brochures, catalogues, and pamplhets. The business was dissolved in early 1763.
Frankklin & Son Printing used a normal costing system. It has two direct cost pools, materials and labor and one indirect cool pool, overhead. Overhead was charged to printing jobs on the basis of direct labor cost. The following information owas known about the firm for 1762.
Budgeted material costs £1000
Budgeted labor costs £2000
Budgeted overhead cost £1500
Actual material costs £900
Acutual labor costs £1800
Actual overhead costs £1250
There was no work in process on January 1, 1762 and there were tow jobs in process on December 31, 1762.
The first job had used £25 of materials so far and £20 of labor.
The second job has used £15 worth of material and £32 of labor.
Franklin & Son Printing had no finished goods inventories because all printing jobs were based on orderes that, when completed, were transferred to cost of goods sold.
1. Compute the overhead allocation rate.
2. Calculate the balance in ending work in process and in cost of goods sold.
3. Calculate under-or overallocated overhead.
4. Calculate the ending balances in work in process and cost of goods sold if the under-or overallcated overhead amount is:
a. Written off to cost of goods sold
b. Prorated using the ending balance (before proration) in cost of goods sold and work-in-process control accounts.
5. Which of the methods in requirement 4 would you choose? Explain.
4-39 (30 min.) Allocation and proration of overhead.
1. Budgeted overhead rate = Budgeted overhead costs ÷ Budgeted labor costs
= £1,500 ÷ £2,000 = 75% of labor cost
2. Ending work in process
Job 1 Job 2 Total
Direct material costs £25 £15 £ 40
Direct labor costs 20 32 52
Overhead
(0.75 × Direct labor costs) 15 24 39
Total costs £60 £71 £131
Cost of goods sold = Beginning WIP + Manufacturing costs – Ending WIP
= £0 + (£900 + £1,800 + £1,800 × 0.75) – £131 = £3,919
3. Overhead allocated = 0.75 × £1,800 = £1,350
Overallocated overhead = Actual overhead – Allocated overhead
= £1,250 – £1,350 = £100 overallocated
4.a. All overallocated overhead is written off to cost of goods sold.
WIP inventory remains unchanged.
Account
(1) Dec. 31, 1762
Account Balance
(Before Proration)
(2) Write-off of £100
Overallocated overhead
(3) Dec. 31, 1762
Account Balance
(After Proration)
(4) = (2) + (3)
Work-in-Process £ 131 £ 0 £ 131
Cost of goods sold 3,919 (100) 3,819
£4,050 £(100) £3,950
4b. Overallocated overhead prorated based on ending balances
Account
(1) Dec. 31, 1762 Balance
(Before Proration)
(2) Balance as a
Percent of Total
(3) = (2) ÷ £4,050 Proration of £100
Overallocated
Overhead
(4) = (3) £100
Dec. 31, 1762 Balance
(After Proration)
(5) = (2) + (4)
Work-in-Process £ 131 0.03 £ (3) £ 128
Cost of Goods Sold 3,919 0.97 (97) 3,822
£4,050 1.00 £(100) £3,950
5. Writing off all of the overallocated overhead to Cost of Goods Sold (CGS) is warranted when CGS is large relative to Work-in-Process Inventory and Finished Goods Inventory and the overallocated overhead is immaterial. Both these conditions apply in this case. Franklin & Son Printing should write off the £100 overallocated overhead to Cost of Goods Sold account.
1. To compute the overhead allocation rate, we need to divide the budgeted overhead cost by the allocation base, which in this case is the budgeted direct labor cost.
Overhead allocation rate = Budgeted overhead cost / Budgeted direct labor cost
= £1500 / £2000
= 0.75
Therefore, the overhead allocation rate is 0.75, or 75%.
2. To calculate the balance in ending work in process (WIP) and cost of goods sold (COGS), we need to consider the costs incurred for the two jobs in process on December 31, 1762, as well as the actual material and labor costs.
For the first job:
Material cost incurred = £25
Labor cost incurred = £20
For the second job:
Material cost incurred = £15
Labor cost incurred = £32
WIP balance = Total material cost incurred + Total labor cost incurred
= (£25 + £15) + (£20 + £32)
= £92
COGS balance = Actual material costs + Actual labor costs + Actual overhead costs
= £900 + £1800 + £1250
= £3950
Therefore, the ending WIP balance is £92, and the COGS balance is £3950.
3. To calculate the under or overallocated overhead, we need to compare the actual overhead costs with the applied overhead costs. Applied overhead costs are calculated by multiplying the actual direct labor costs by the overhead allocation rate.
Applied overhead costs = Actual direct labor costs x Overhead allocation rate
= £1800 x 0.75
= £1350
Under or overallocated overhead = Actual overhead costs - Applied overhead costs
= £1250 - £1350
= -£100
Therefore, the overhead is overallocated by £100.
4a. If the under or overallocated overhead amount is written off to cost of goods sold, we would adjust the COGS balance by reducing it by the underallocated amount:
Adjusted COGS balance = COGS balance - Underallocated overhead
= £3950 - (-£100)
= £4050
The ending WIP balance remains the same.
4b. If the under or overallocated overhead amount is prorated using the ending balances in the COGS and WIP control accounts before proration, we would need to distribute the underallocated amount proportionally between the COGS and WIP.
To calculate the proration:
Proration rate for COGS = COGS balance / (COGS balance + WIP balance)
= £3950 / (£3950 + £92)
= £3950 / £4042
≈ 0.9767
Proration rate for WIP = WIP balance / (COGS balance + WIP balance)
= £92 / (£3950 + £92)
≈ 0.0233
Prorated underallocated overhead for COGS = Underallocated overhead x Proration rate for COGS
= -£100 x 0.9767
≈ -£97.67
Prorated underallocated overhead for WIP = Underallocated overhead x Proration rate for WIP
= -£100 x 0.0233
≈ -£2.33
Adjusted COGS balance = COGS balance - Prorated underallocated overhead for COGS
= £3950 - (-£97.67)
≈ £4047.67
Adjusted WIP balance = WIP balance - Prorated underallocated overhead for WIP
= £92 - (-£2.33)
≈ £94.33
5. In this case, I would choose the method of prorating the underallocated overhead, as it distributes the underallocated amount proportionally between the COGS and WIP accounts based on their respective balances. This method provides a more accurate representation of the impact of the underallocated overhead on both the COGS and WIP.