No. 4-37 Page 146

No.
4-37 page 146
The solution assumes all materials used are direct materials. A summary of the T-accounts for
Southwick Company before adjusting for under- or overallocation of overhead follows:
Direct Materials Control

1/1/2014 25,000 Material used for
Purchases 240000 manufacturing 234,000
12/31/2014 31000
Finished Goods Control

1/1/2014 10,000 Cost of goods
Transferred in sold 880,000
from WIP 925000
12/31/2014 55,000
Manufacturin Overhead Control

Manufacturing
overhead
costs 514000
1. From Direct Materials Control T-account,

Direct materials issued to production = $234,000 that appears as a credit
Direct manufacturing labor co

2. Direct manufacturing labor-hours = Direct manufacturing wage rate p
= $348,000 =
$12 per hour
Manufacturing overhead allocated Direct manufacturing X

labor hours
29,000 hourS X $16 per hour =
3. 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,

Work in process inventory
on 12/31/2014 = $44,000 + $234,000 + $348,000 + $464,000
= $165,000
5. From the credit entry to Finished Goods Control T-account, Cost of goods sold (before
Debits to Manufacturing proration)
Credit = $880,0
to Manufacturin
Manufacturing overhead Overhead Control - Overhead Allocated
6. underallocated = 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, co
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:
Proration of 50000
Account Balance Underallocated
Account (Before Proraton) Manufacturing Overhead
(1). (2). (3).
0.15 X 50,000
Work in Process $ 165,000 (15%) =
0.05 X 50,000 7500
Finished Goods 55,000 ( 5%) =
0.80 X 50,000 2,500
Cost of Goods Sold 880.000 (80%) = 40,000
$1,100,000 (100%) $50,000
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 Pro
Cost of Goods Sold on E
Revenues $1,050,000 $1,0
Cost of goods sold 930,000 9
Gross margin 120,000 1
Marketing and distributon costs 125000
Operating income/(loss) -$5,000
9.
If the purpose is to report the most accurate inventory and cost of goods sold figures, thepreferred metho
manufacturing overhead allocated component in the inventory and cost of goods sold accounts. Proration
Work in Process, Finished Goods, and Cost of Goods Sold will equal the proration based on the manufac
component if the proportions of direct costs to manufacturing overhead costs are constant in the Work in
and Cost of Goods Sold accounts. Even if this is not the case, the prorations based on Work in Process, F
Goods Sold will better approximate the results if actual cost rates had been used rather than the write-off
method.
Another consideration in Needham's decision about how to dispose of underallocated manufacturing over
operating income. The write-off to Cost of Goods Sold will lead to an operating loss. Proration based on th
Process, Finished goods, and Cost of Goods Sold will help Needham avoid the loss and show an operatin
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 ap
accounts for
ws:
Work-in-Process Control
1/1/2014 44,000 Transferred to
Direct materials 234000 finished goods 925,000
Direct manuf.
labor 348,000
Manuf. overhead
allocated 464,000
12/31/2014 165,000
Cost of Goods Sold

Finished goods
sold 880,000
Manufacturing Overhead Allocated
Manufacturing
Overhead
Allocated
work in
process 464000
manufacturing labor costs

nufacturing wage rate per hour
$29,000 per hour
Manufacturing overhead rate

464000
+ $348,000 + $464,000 -$925,000
fore proration)
Credit = $880,000
to Manufacturing
Overhead Allocated
by $50,000. Hence, cost of
ss, Finished
Account Balance
(After Proration)
(4)=(2) + (3)
172,500
57,500
920,000
$1,150,000
based on
Proration Based
on Ending Balances
$1,050,000
920,000
130,000
125000
$5,000
es, thepreferred method is to prorate based on the

old accounts. Proration based on the balances in
based on the manufacturing overhead allocated
onstant in the Work in Process, Finished Goods,
d on Work in Process, Finished Goods, and Cost of
ather than the write-off to Cost of Goods Sold
ted manufacturing overhead is the effects on

s. Proration based on the balances in Work in
s and show an operating income
ommended proration approach.

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4-37 page 146

Direct Materials Control

Finished Goods Control

Manufacturin Overhead Control

1. From Direct Materials Control T-account,

Direct manufacturing labor co

Manufacturing overhead allocated Direct manufacturing X

3. From the debit entry to Finished Goods T-account,

4. From Work-in-Process T-account,

b. Proration based on ending balances (before proration) in Work in Process, Finished

Account balances in each account after proration follows:

Cost of Goods Sold

Manufacturing Overhead Allocated

manufacturing labor costs

Manufacturing overhead rate

+ $348,000 + $464,000 -$925,000

by $50,000. Hence, cost of

es, thepreferred method is to prorate based on the

ted manufacturing overhead is the effects on

ommended proration approach.

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