Question

Toffee Company produces the Micron-7, a computer-controlled home coffee roaster. Toffee uses a normal-costing system and allocates overhead at a rate of $2 per direct manufacturing labor dollar. The following data reflect select (partial) activity for the year 2020:

Costs incurred: Purchases of direct materials on credit Direct manufacturing labor Indirect labor Depreciation, factory equipment		$50,000 80,000 25,000 40,000
	January 1, 2020	December 31, 2020
Direct materials Work in process Finished goods	$2,000 4,000 10,000	5,000 7,000 8,000

Assume total actual MOH for the year is $152,000

Required (show your work):

1. Prepare journal entries for the 4 selected costs incurred. Also, prepare the journal entry to close out over- or underallocated overhead to COGS.
2. Calculate the dollar amount for direct materials used, cost of goods manufactured, and cost of goods sold.
3. Assume Toffee Company uses the proration method to dispose of over- or underallocated MOH. By how much would COGS increase/decrease under this method?

Answer 1

Calculation of Over/Under Allocated Overhead Particulars Amount Manufacturing OH allocated 1,60,000 (80,000*2) (Based on Direct labor incureed) Manufacturing OH actually incurred 1,52,000 Over Allocation 8,000

то Journal Entries to record Four selected costs Particulars Debit Credit Direct Materials A/C Dr 50,000 Trade Payables A/C 50,000 (Being direct materials purchased on credit) Direct Labor A/C Dr 80,000 To Cash A/C 80,000 (Being direct labor cost incurred) Indirect Labor A/C Dr 25,000 To Cash A/C 25,000 (Being indirect labor cost incurred) Depreciation on factory Equipment A/c Dr 40,000 Το Factory Equipment A/C 40,000 (Being depreciation charged on factory equipment) Cost of Goods Manufacturing A/C Dr 3,55,000 To Direct Materials A/C 50,000 Το Direct Labors A/C 80,000 To Indirect Labor A/C 25,000 To Depreciation on Factory Equipment/c 40,000 To Manufacturing Overhead A/C 1,60,000 (Being Manufacturing costs transferred to cost of goods manufactured) Manufacturing Overhead A/C Dr 8,000 To Cost of Goods Sold A/C 8,000 (Being over allocated overhead allocated to cost of goods sold)

Computation of Direct Materials Used Particulars Opening Stock Add: Materials Purchased during the year Less : Closing Stock Direct Materials Used Amount 2,000 50,000 5,000 47,000 Computation of Cost of Goods Manufactured Particulars Direct Materials Used Direct Labor Prime Cost Indirect Labor Depreciation on Factory Equipment Manufacturing Overhead Factory Cost Add: Opening WIP Less Closing WIP Cost of Goods Manufactured Amount 47,000 80,000 1,27,000 25,000 40,000 1,60,000 3,52,000 4,000 7,000 3,49,000 Computation of Cost of Goods Sold Particulars Cost of Goods Manufactured Add : Opening Finished Goods Less: Closing Finished Goods Unadjusted Cost of Goods Sold Less : Over Absorbtion of MOH Adjusted Cost of Goods Sold Amount 3,49,000 10,000 8,000 3,51,000 8,000 3,43,000

If the company uses proration method the COGS would increase by 8,328. Refer the following workings

Proration Method Under Proration the ober absorbed costs would be allocated based on total ending balances (before proration) in work in process, finished goods and cost of goods sold Particulars Closing balance of Finished goods Closing balance of WIP Unadjusted Cost of Goods Sold Total Amount 8,000 7,000 3,51,000 3,66,000 Overhead allocation Adjusted Balances 2.19% 175 7,825 1.91% 153 6,847 95.90% 7,672 3,43,328 3,58,000

Computation of Cost of Goods Manufactured Particulars Amount Direct Materials Used 47,000 Direct Labor 80,000 Prime Cost 1,27,000 Indirect Labor 25,000 Depreciation on Factory Equipment 40,000 Manufacturing Overhead 1,60,000 Factory Cost 3,52,000 Add: Opening WIP 4,000 Less Closing WIP 6,847 Cost of Goods Manufactured 3,49,153 Particulars Cost of Goods Manufactured Add : Opening Finished Goods Less: Closing Finished Goods Cost of Goods Sold Cost of Goods Sold prviously calculated Difference Amount 3,49,153 10,000 7,825 3,51,328 3,43,000 8,328

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