The Clash Company Uses Job Order Costing ✓ Solved

The Clash Company Uses Job Order Costing Costs Are Charged To Jobs U

The assignment involves calculating underallocated or overallocated overhead using the most theoretically correct proration method, determining the actual overhead rate based on actual costs, comparing actual and corrected Work in Process balances, and analyzing differences between these balances in normal costing versus actual costing.

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Introduction

Cost accounting plays a central role in manufacturing by providing managers with vital information about the expenses associated with production. Different costing methods, including normal costing and actual costing, influence how costs are assigned to jobs and how overhead variances are handled. The case of The Clash Company exemplifies the application of job order costing, where costs are accumulated per job, and overhead is allocated based on direct labor costs. This paper explores the process of computing and prorating underallocated or overallocated overhead, determining the actual overhead rate, and comparing Work in Process (WIP) balances under different costing methodologies to understand their implications for managerial decision-making.

Calculation of Underallocated or Overallocated Overhead and Proration

Across 2014, The Clash Company estimated overhead costs at $72,000 based on an estimated direct labor cost of $60,000, leading to a predetermined overhead rate of 120% of direct labor costs ($72,000 / $60,000). The actual overhead incurred was $70,000. To find the underallocated or overallocated overhead, first compute the applied overhead:

Applied overhead = Predetermined rate Actual direct labor cost = 120% Actual direct labor ($this needs to be calculated from data).

The direct labor costs charged to jobs sum up to $10,000 + $11,250 + $15,000 + $20,000 + $6,250 = $62,750.

Thus, applied overhead = 120% * $62,750 = $75,300.

Overallocated overhead = Applied overhead - Actual overhead = $75,300 - $70,000 = $5,300.

Since the overhead applied exceeds actual overhead, the company has overallocated overhead by $5,300. To prorate this overallocated amount to the relevant accounts—cost of goods sold (COGS), Finished Goods, and Work in Process—the company uses the most theoretically correct method, which is proration based on the relative balances of these accounts.

The total balances of COGS, Finished Goods, and WIP are needed. If the total balances are given or calculated, the overallocated overhead is distributed based on each account's proportion of total costs or balances. For example, if COGS constitutes 50% of the total, Finished Goods accounts for 30%, and WIP for 20%, then:

• Overallocated overhead to COGS = 50% * $5,300 = $2,650
• To Finished Goods = 30% * $5,300 = $1,590
• To Work in Process = 20% * $5,300 = $1,060

This reflects the most accurate theoretical approach by allocating overhead in proportion to the account balances, thus adjusting each account accordingly.

Actual Overhead Rate and Work in Progress Balances

The actual overhead rate is computed by dividing the actual overhead incurred by the actual direct labor cost:

Actual overhead rate = Actual overhead / Actual direct labor cost = $70,000 / $62,750 ≈ 1.115 or 111.5%.

If the company used actual costing, overhead for each job would be assigned based on this actual rate, leading to a different valuation of WIP and finished goods. The total balance in WIP under actual costing would be computed by summing all direct material, direct labor, and applied overhead based on actual costs.

Assuming the direct materials and direct labor costs for each job are known, applying the actual overhead rate to the actual direct labor costs yields the total cost per job, which accumulates in the WIP account.

When comparing the actual WIP balance with the corrected normal costing balance, which is adjusted after proration of overhead, they may not be the same. The difference arises because actual costing assigns costs based on actual data, while normal costing applies predetermined overhead rates and adjusts at year-end. Theoretically, they should be close but may differ due to timing differences, estimation errors, and proration techniques.

Conclusion

The analysis of overhead variances under different costing methods provides critical insights into cost management and accuracy of product costing. The process of prorating overhead based on the most theoretically correct method ensures that costs are allocated fairly across accounts. Understanding the differences between actual costing and normal costing helps managers make informed decisions about cost control, pricing, and profitability analysis. While the balances in Work in Process may differ temporarily, aligning costs through systematic adjustments ensures accuracy and consistency in financial reporting.

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