Work in process inventory
SOLUTION
(35 min.) General ledger relationships, under- and overallocation.
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 Work-in-Process Control
1-1-2017 42,000
Material used for
1-1-2017 82,000
Transferred to
Manuf. overhead
Finished Goods Control Cost of Goods Sold
1-1-2017 105,000
Cost of goods
Finished goods
Manufacturing Overhead Control Manufacturing Overhead Allocated
Manufacturing
Manufacturing
1. From Direct Materials Control T-account,
2. Direct manufacturing labor-hours =
Direct manufacturing labor costs
Direct manufacturing wage rate per hour
Manufacturing overhead
allocated
=
Direct manufacturing
labor hours
Manufacturing
overhead rate
3. From the debit entry to Finished Goods T-account,
4. From Work-in-Process T-account,
5. From the credit entry to Finished Goods Control T-account, Cost of goods sold (before
6.
Manufacturing overhead
underallocated
=
Debits to Manufacturing
Overhead Control
–
Credit to Manufacturing
Overhead Allocated
=$425,000 – $380,000
= $45,000 underallocated
7. a. Write-off to Cost of Goods Sold will increase (debit) Cost of Goods Sold by $45,000.
b. Proration based on ending balances (before proration) in Work in Process, Finished
Account balances in each account after proration follows:
Account
(1)
Account Balance
(Before Proration)
(2)
Proration of $45,000
Underallocated
Manufacturing Overhead
(3)
Account Balance
(After Proration)
(4) = (2) + (3)
Work in Process $ 190,000
(19%)
0.19 $45,000 = $ 8,550 $ 198,550
00%
8. Keezel’s operating income using write-off to Cost of Goods Sold and Proration based on
ending balances (before proration) follows:
Write-off to Proration Based
Cost of Goods Sold on Ending Balances
Revenues $1,550,000 $1,550,000
9. If the purpose is to report the most accurate inventory and cost of goods sold figures, the
preferred method is to prorate based on the manufacturing overhead allocated component in the
inventory and cost of goods sold accounts. Proration based on the balances in Work in Process,
will lead to an operating loss. Proration based on the balances in Work in Process, Finished
Goods, and Cost of Goods Sold will help Keezel 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,
4-43 Overview of general ledger relationships. Estevez Company uses normal costing in its
job-costing system. The company produces kitchen cabinets. The beginning balances (December
1) and ending balances (as of December 30) in their inventory accounts are as follows:
Additional information follows:
a. Direct materials purchased during December were $132,600.
b. Cost of goods manufactured for December was $468,000.
c. No direct materials were returned to suppliers.
d. No units were started or completed on December 31 and no direct materials were
requisitioned on December 31.
e. The manufacturing labor costs for the December 31 working day: direct manufacturing labor,
$8,600, and indirect manufacturing labor, $2,800.
f. Manufacturing overhead has been allocated at 110% of direct manufacturing labor costs
through December 31.
Required:
1. Prepare journal entries for the December 31 payroll.
2. Use T-accounts to compute the following:
a. The total amount of materials requisitioned into work in process during December
b. The total amount of direct manufacturing labor recorded in work in process during
December (Hint: You have to solve requirements 2b and 2c simultaneously)
c. The total amount of manufacturing overhead recorded in work in process during
December
d. Ending balance in work in process, December 31
e. Cost of goods sold for December before adjustments for under- or overallocated
manufacturing overhead
3. Prepare closing journal entries related to manufacturing overhead. Assume that all under-
or overallocated manufacturing overhead is closed directly to Cost of Goods Sold.
SOLUTION
(4055 min.) Overview of general ledger relationships.
1. Adjusting entry for 12/31 payroll.
(a) Work-in-Process Control 8,600
Manufacturing Department Overhead Control 2,800
(b) Work-in-Process Control 9,460
Note: Students tend to forget entry (b) entirely. Stress that a budgeted overhead allocation
rate is used consistently throughout the year. This point is a major feature of this
problem.
2. a-e An effective approach to this problem is to draw T-accounts and insert all the known
figures. Then, working with T-account relationships, solve for the unknown figures. Entries (a)
and (b) are posted into the T-accounts that follow.
Materials Control
Beginning balance 12/1
4,200
(a) Direct materials requisitioned into work in process during December equals $119,800
because no materials are requisitioned on December 31.
Work-in-Process Control
Beginning balance 12/1
13,400
Balance 12/30 18,000
(a) Direct manuf. labor 12/31 payroll 8,600
(b) Manuf. overhead allocated 12/31 9,460c
b Direct manufacturing labor and manufacturing overhead allocated are unknown. Let x = Direct
manufacturing labor up to 12/30 payroll, then manufacturing overhead allocated up to 12/30
payroll = 1.10x
Use the T-account equation and solve for x:
$13,400 + $119,800 + x + 1.10x – $468,000 = $18,000
Total direct manufacturing labor for December = $168,000 + $8,600 (direct manufacturing labor
Total manufacturing overhead allocated for December = $184,800 + $9,460c = $194,260
labor incurred on 12/31.
(b) Total direct manufacturing labor for December = $176,600.
(c) Total manufacturing overhead allocated (recorded) in work in process equals $194,260.
(d) Ending balance in work-in-process inventory on December 31 equals $18,000 + $8,600
(direct manufacturing labor added on 12/31, requirement 1) + $9,460 (manufacturing
overhead allocated on 12/31, requirement 1) = $36,060.
An alternative approach to solving requirements 2b, 2c, and 2d is to calculate the
work-in-process inventory on December 31, recognizing that because no new units were started
or completed, no direct materials were added and the direct manufacturing labor and
manufacturing overhead allocated on December 31 were added to the work-in-process inventory
balance of December 30.
Work-in-process
inventory
=
Work-in-process
inventory on
+
Direct
manufacturin
g labor
+
Manufacturing
overhead
allocated on
We can now use the T-account equation for work-in-process inventory account from 12/1 to
12/31, as follows.
Let x = Direct manufacturing labor for December
Then 1.10x = Manufacturing overhead allocated for December
Work-in-p
rocess
inventory
on 12/1
+
Direct
materials
added in
December
+
Direct
manufacturing
labor added in
December
+
Manufacturing
overhead
allocated in
December
–
Cost of goods
manufactured
in December
=
Work-in-proce
ss inventory
on 12/31
Finished Goods Control
(e) Cost of goods sold for December before adjustments for under- or overallocated overhead
equals $438,000:
Cost of Goods Sold
Manufacturing Department Overhead Control
Balance through 12/30
(a) Indirect manufacturing
188,000
Manufacturing Overhead Allocated
(c) Closing entry 194,260 184,800
Balance through 12/30
Wages Payable Control
3. Closing entries:
(c) Manufacturing Overhead Allocated 194,260
To close manufacturing overhead accounts and overallocated overhead to cost of goods sold
4-44 Allocation and proration of overhead. Resource Room prints custom training material
for corporations. The business was started January 1, 2017. The company uses a normal-costing
system. It has two direct-cost pools, materials and labor, and one indirect-cost pool, overhead.
Overhead is charged to printing jobs on the basis of direct labor cost. The following information
is available for 2017.
There were two jobs in process on December 31, 2017: Job 11 and Job 12. Costs added to each
job as of December 31 are as follows:
Resource Room 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 2017 (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
(25 min.) Allocation and proration of overhead.
1. Budgeted overhead rate = Budgeted overhead costs ÷ Budgeted direct labor costs
2. Ending work in process
Job 11 Job 12 Total
Direct material costs $ 4,720 $ 5,090 $ 9,810
Cost of goods sold = Beginning WIP + Manufacturing costs – Ending WIP
3. Overhead allocated = 1.40 × $175,000 = $245,000
4a. All underallocated overhead is written off to cost of goods sold.
WIP inventory remains unchanged.
Account
(1)
Dec. 31, 2017
Account Balance
(Before Proration)
Write-off of $3,200
Underallocated
overhead
Dec. 31, 2017
Account Balance
(After Proration)
(2) (3) (4) = (2) + (3)
Work in Process $ 40,050 $ 0 $ 40,050
Cost of goods sold 537 ,950 2 ,200 540 ,150
4b. Underallocated overhead prorated based on overhead allocated before proration.
Account
(1)
Dec. 31, 2017
Account
Balance
(Before
Proration)
(2)
Allocated Overhead
Included in
Dec. 31, 2017
Account Balance
(Before Proration)
(3) (4)
Proration of $2,200
Underallocated
Manufacturing Overhead
(5)
Dec. 31, 2017
Account
Balance
(After
Proration)
(6) = (2) + (5)
Work in Process $ 40,050 $ 17,640a(7.2%) 0.072 $2,200 = $ 158 $ 40,208
5. Writing off all of the underallocated overhead to Cost of Goods Sold (COGS) is warranted
when COGS 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. Resource
Room should write off the $2,200 underallocated overhead to Cost of Goods Sold account.
4-45 (25–30 min.) Job costing, ethics. Joseph Underwood joined Anderson Enterprises as
controller in October 2016. Anderson Enterprises manufactures and installs home greenhouses.
The company uses a normal-costing system with two direct-cost pools, direct materials and
direct manufacturing labor, and one indirect-cost pool, manufacturing overhead. In 2016,
manufacturing overhead was allocated to jobs at 150% of direct manufacturing labor cost. At the
end of 2016, an immaterial amount of underallocated overhead was closed out to cost of goods
sold, and the company showed a small loss.
Underwood is eager to impress his new employer, and he knows that in 2017, Anderson’s
upper management is under pressure to show a profit in a challenging competitive environment
because they are hoping to be acquired by a large private equity firm sometime in 2018. At the
end of 2016, Underwood decides to adjust the manufacturing overhead rate to 160% of direct
labor cost. He explains to the company president that, because overhead was underallocated in
2016, this adjustment is necessary. Cost information for 2017 follows:
Anderson’s revenue for 2017 was $5,550,000, and the company’s selling and administrative
expenses were $2,720,000.
Required:
1. Insert the given information in the T-accounts below. Calculate the following amounts to
complete the T-accounts:
a. Direct materials control, 12/31/2017
b. Manufacturing overhead allocated, 2017
c. Cost of goods sold, 2017
2. Calculate the amount of under- or overallocated manufacturing overhead.
3. Calculate Anderson’s net operating income under the following:
a. Under- or overallocated manufacturing overhead is written off to cost of goods sold.
b. Under- or overallocated manufacturing overhead is prorated based on the ending balances
in work in process, finished goods, and cost of goods sold.
4. Underwood chooses option 3a above, stating that the amount is immaterial. Comment on the
ethical implications of his choice. Do you think that there were any ethical issues when he
established the manufacturing overhead rate for 2017 back in late 2016? Refer to the IMA
Statement of Ethical Professional Practice.