91Ó°ÊÓ

(S. Sridhar, adapted) Needham Company uses normal costing in its job-costing system. Partially completed T-accounts and additional information for Needham for 2011 are as follows: Additional information follows: a. Direct manufacturing labor wage rate was \(\$ 15\) per hour. b. Manufacturing overhead was allocated at \(\$ 20\) per direct manufacturing labor-hour. c. During the year, sales revenues were \(\$ 1,090,000\), and marketing and distribution costs were \(\$ 140,000\). 1\. What was the amount of direct materials issued to production during \(2011 ?\) 2\. What was the amount of manufacturing overhead allocated to jobs during \(2011 ?\) 3\. What was the total cost of jobs completed during \(2011 ?\) 4\. What was the balance of work-in-process inventory on December \(31,2011 ?\) 5\. What was the cost of goods sold before proration of under- or overallocated overhead? 6\. What was the under-or overallocated manufacturing overhead in \(2011 ?\) 7\. Dispose of the under- or overallocated manufacturing overhead using the following: a. Write-off to cost of Goods Sold b. Proration based on ending balances (before proration) in Work-in-Process Control, Finished Goods Control, and cost of Goods Sold 8\. Using each of the approaches in requirement \(7,\) calculate Needham's operating income for 2011 . 9\. Which approach in requirement 7 do you recommend Needham use? Explain your answer briefly.

Step by step solution

01

Calculate Direct Materials Used in Production

Given the T-accounts, identify the balance for Direct Materials. Use any reported figures to compute the materials that were issued to production during 2011. Direct materials used can often be determined by analyzing T-accounts or given figures that relate to materials withdrawn for production.

02

Determine Manufacturing Overhead Allocated

Use the provided rate of \( \$20 \) per direct labor-hour along with any given data on the number of direct labor hours worked. Multiply this rate by the corresponding hours to find the total overhead allocated to jobs during 2011. For example, if 3,000 labor hours were worked, the allocation would be \( 3,000 \times 20 \).

03

Compute the Total Cost of Jobs Completed

Add the costs of direct materials, direct labor, and allocated manufacturing overhead to find the total cost of jobs finished during 2011. This involves summing up direct inputs and overhead directly related to production jobs.

04

Find the Ending Balance of Work-in-Process Inventory

Using the T-accounts and accounting principles, find the ending Work-in-Process Inventory for December 31, 2011. This includes calculating from balances and adjustments across the period based on job movement.

05

Calculate Cost of Goods Sold Before Overhead Proration

Determine the cost of goods sold before addressing any overallocated or underallocated overhead. This typically involves direct calculation using T-accounts reflecting transfers to finished goods and sales.

06

Identify Under-or Overallocated Manufacturing Overhead

By comparing allocated overhead to actual overhead based on T-accounts or given amounts, determine the extent of allocation discrepancy. This difference indicates under- or overallocated manufacturing overhead.

07

Step 7a: Write-off Overallocated/Underallocated Overhead to COGS

One way to handle discrepancies is to adjust directly by writing off the amount over- or underallocated to the Cost of Goods Sold (COGS), modifying the COGS by this discrepancy.

08

Step 7b: Proration Based on Ending Balances

Distribute the overallocated or underallocated overhead proportionally based on the ending balances found in Work-in-Process, Finished Goods, and COGS. Use these proportions to adjust each balance correctly.

09

Calculate Operating Income

Add sales revenues and subtract categorized costs such as COGS (adjusted by methods from Step 7a or 7b), manufacturing overhead, and marketing and distribution costs to find the operating income for 2011.

10

Recommend the Best Overhead Disposal Method

Based on the calculations and impact on financial statements, propose whether Needham should choose the simpler write-off method or the proration method, often defending the choice with implications on financial reporting accuracy or managerial preference.

Unlock Step-by-Step Solutions & Ace Your Exams!

• Full Textbook Solutions

  Get detailed explanations and key concepts

• Unlimited Al creation

  Al flashcards, explanations, exams and more...

• Ads-free access

  To over 500 millions flashcards

• Money-back guarantee

  We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91Ó°ÊÓ!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Direct Materials

Direct materials in a job costing system refer to raw materials that are directly traceable to a specific job or production process. These materials are essential for creating the final product and can be measured and recorded accurately. Companies, like Needham, track direct materials by using T-accounts, which helps in understanding what materials have been used up in production.

• Direct materials are easy to identify and quantify.
• These materials directly impact the cost of the production, so accurate tracking is crucial.
• In the case of Needham Company, understanding the T-account balances can help calculate how much direct material was used during the year.

Analysing these figures is vital for determining production costs and managing budgets effectively. By keeping an accurate record of direct material usage, companies can not only track spending but also forecast future needs and budget accordingly.

Manufacturing Overhead

Manufacturing overhead includes all the costs associated with the production process that cannot be directly traced to specific jobs. This can include costs like electricity for operating machines, factory rent, and salaries for supervisors. Needham allocates these costs based on direct labor hours, using a predetermined overhead rate.

• Predetermined overhead rates help allocate costs more evenly across projects.
• For Needham, the rate is set at \( \$20 \) per direct labor-hour.
• If, for example, 3,000 labor hours are worked, the overhead allocated would be \( 3,000 \times 20 \).

It's essential to separate these costs from direct materials and labor to understand the true cost of production. By doing so, companies can price their products correctly and ensure profitability.

Cost of Goods Sold

The Cost of Goods Sold (COGS) represents the direct costs attributable to the production of the goods sold by a company. This includes direct materials, direct labor, and allocated manufacturing overhead. In Needham's context, the COGS is calculated before adjusting for any over or underallocated overhead.

• COGS is vital for measuring the company’s production efficiency and profitability.
• It includes all costs associated with manufacturing and preparing a product for sale.
• Adjustments for over or underallocated overhead can impact the final COGS figure.

Analyzing COGS helps Needham determine how well they are controlling production costs and can guide strategic decision-making in production management and pricing strategies.

Operating Income

Operating income is a critical financial metric that measures the profitability of a company's core business activities. For Needham, calculating operating income involves subtracting costs from sales revenue. This includes adjusting the Cost of Goods Sold for any allocated overhead discrepancies as determined by Needham's chosen methodology.

• It is calculated as sales revenues minus the cost of goods sold, operating expenses, and adjustments for overhead.
• Needham's operating income reflects the efficiency and productivity of its operations.
• It offers insights into whether Needham can sustain its operating model profitably over the long term.

By understanding and improving operating income, companies like Needham can ensure their business remains competitive, managing costs effectively and maximizing profitability.