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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.

  • accounting -

    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.

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