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Direct materials
Direct labor
Job 11
$4,870
$5,100
Job 12
$5,910
$6,800
InStep Company has no finished goods inventories because all printing jobs are transferred to cost
of goods sold when completed.
Required:
1. Compute the overhead allocation rate.
2. Calculate the balance in ending work in process and cost of goods sold before any adjustments
for under- or overallocated overhead.
3. Calculate under- or overallocated overhead.
4. Calculate the ending balances in work in process and cost of goods sold if the under- or
overallocated overhead amount is as follows:
a. Written off to cost of goods sold
b. Prorated using the overhead allocated in 2014 (before proration) in the ending balances of
cost of goods sold and work-in-process control accounts
5. Which of the methods in requirement 4 would you choose? Explain.
SOLUTION
1. Budgeted overhead rate = Budgeted overhead costs ÷ Budgeted labor costs
= $315,000 ÷ $225,000 = 140% of labor cost
2. Ending work in process
Job 11
Job 12
Total
Direct material costs
$ 4,870
$ 5,910
$10,780
Direct labor costs
5,100
6,800
11,900
Overhead
(1.40 × Direct labor costs)
7,140
9,520
16,660
Total costs
$17,110
$22,230
$39,340
Cost of goods sold = Beginning WIP + Manufacturing costs – Ending WIP
= $0 + $148,500 + $213,500 + ($213,500 × 1.40) – $39,340 = $621,560
3. Overhead allocated = 1.40 × $213,500 = $298,900
Underallocated overhead = Actual overhead – Allocated overhead
= $302,100 – $298,900 = $3,200 underallocated
4a. All underallocated overhead is written off to cost of goods sold.
WIP inventory remains unchanged.
Account
(1)
Dec. 31, 2014
Account Balance
(Before Proration)
(2)
Write-off of $3,200
Underallocated
overhead
(3)
Dec. 31, 2014
Account Balance
(After Proration)
(4) = (2) + (3)
Work in Process
$ 39,340
$ 0
$ 39,340
Cost of goods sold
621,560
3,200
624,760
$660,900
$3,200
$664,100
4b. Underallocated overhead prorated based on overhead allocated before proration.
Account
(1)
Dec. 31, 2014
Account
Balance
(Before
Proration)
(2)
Allocated Overhead
Included in
Dec. 31, 2014
Account Balance
(Before Proration)
(3) (4)
Proration of $3,200
Underallocated
Manufacturing Overhead
(5)
Dec. 31, 2014
Account
Balance
(After
Proration)
(6) = (2) + (5)
Work in Process
$ 39,340
$ 16,660a (5.57%)
0.0557 $3,200 = $ 178
$ 39,518
Cost of Goods Sold
621,560
282,240b (94.43%)
0.9443 $3,200 = 3,022
624,582
Total
$660,900
$298,900 100%
$3,200
$664,100
a$11,900 1.40; b($213,500 – $11,900) 1.40
5. Writing off all of the underallocated 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
underallocated overhead is immaterial. Both these conditions apply in this case. InStep Company
should write off the $3,200 underallocated overhead to Cost of Goods Sold account.
4-40 (25-30 min.) Job costing, contracting, ethics.
Rand Company manufactures modular homes. The company has two main products that it sells
commercially: a 1,000-square-foot, one-bedroom model and a 1,500-square-foot, two-bedroom
model. The company recently began providing emergency housing (huts) to the Federal
Emergency Management Agency (FEMA). The emergency housing is similar to the 1,000-square-
foot model.
FEMA has requested Rand to create a bid for 150 emergency huts to be sent for wildfire
victims in the West. Your manager has asked that you prepare this bid. In preparing the bid, you
find a recent invoice to FEMA for 200 huts provided during the most recent hurricane season in
the South. You also have a standard cost sheet for the 1,000-square-foot model sold commercially.
Both are provided as follows:
1.
Direct manufacturing costs:
Direct materials ($9,500 150 huts)
Direct manufacturing labor ($704 150 huts)
Manufacturing overhead (3.50 $105,600)
Total costs
Markup (20% $1,900,200)
Total bid price
$1,425,000
105,600
369,600
$1,900,200
380,040
$2,280,240
2.
Direct manufacturing costs:
Direct materials
Direct manufacturing labor
Manufacturing overhead
Total costs
Markup (20% of $2,122,350)
Total bid price
$1,567,500
123,300
431,550
$2,122,350
424,470
$2,546,820
Direct materials = ($2,090,000/200) 150 = $1,567,500
Direct manufacturing labor
$164,400 150 huts = $123,300
200 huts
=
Manufacturing overhead = (3.50 $123,300) = $431,550
3. The main discrepancies in costs (before the mark up) in requirements 1 and 2 are as follows:
a. Materials are marked up by 10% in the Sept. 15, 2014, invoice.
($1,567,500 – $1,425,000)/$1,425,000 = 10%.
b. Costs are double-counted based on the Sept. 15, 2014, invoice (inspection and setup
costs are included as both a direct cost as part of direct manufacturing labor and in
manufacturing overhead allocated at 3.5 times direct manufacturing labor cost).
c. The standard cost sheet includes 32 direct manufacturing labor hours, while the
Sept. 15, 2014, invoice includes 30 hours of production labor.
4. According to the IMA Standards of Ethical Conduct for Practitioners of Management
Accounting and Financial Management, the following principles should guide your decision
to present the bid based on the retail cost of producing the huts:
a. Competence—responsibility to provide information that is accurate.
b. Integrity—refraining from engaging in any conduct that would prejudice carrying out
duties ethically or that would discredit the profession.
c. Credibility—disclose all relevant information.
I would go to my boss with the bid in requirement 1 after checking
(a) If any direct material savings is possible and
