The Clash Company Uses Job Order Costing 341058

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

The Clash Company utilizes a job-order costing system operating on a normal costing basis, with overhead allocated based on direct labor costs. Key financial data includes estimated direct labor costs of $60,000 and estimated overhead costs of $72,000 for 2014. The beginning balances in Materials Control and Work in Process (WIP) accounts, as well as direct materials purchased and costs accumulated from prior jobs, are provided to analyze overhead allocations and compute variances. The company’s management seeks to understand whether their overhead is under- or overapplied and how to appropriately allocate this variance to their accounts. Additionally, the company intends to evaluate the implications of using actual costing versus normal costing, with specific interest in the impact on WIP account balances and the accuracy of job costing. This report aims to compute the under- or overallocated overhead, prorate it using a theoretically correct method, compare balancing under actual costing, and analyze the correctness and implications of these costing methods.

Paper For Above instruction

Introduction

The application of costing methods in manufacturing companies significantly influences cost accuracy and financial decision-making. Understanding the nuances of normal costing, overhead allocation, and actual costing is crucial to maintaining precise job cost records. This paper explores these concepts through a detailed analysis of The Clash Company’s 2014 financial data, highlighting the effects of under- or overallocated overhead and contrasting actual versus normal costing impacts on work-in-progress balances.

Calculating Underallocated or Overallocated Overhead

The first step in analyzing The Clash Company’s overhead management involves determining whether overhead is under- or overallocated. The estimated overhead for 2014 was $72,000 based on a budgeted direct labor cost of $60,000, resulting in an predetermined overhead rate of 120% ($72,000 / $60,000). However, the actual overhead incurred was $70,000. Using this rate, the applied overhead to jobs during 2014 can be calculated, and the difference between applied and actual overhead indicates over- or underallocation.

The total direct labor costs incurred for all jobs during 2014 amounted to $62,500, with specific contributions from individual jobs as provided. Applying the predetermined rate, the estimated overhead applied is calculated as follows:

  • Total applied overhead = 120% of total direct labor costs = 1.20 * $62,500 = $75,000

This exceeds the actual overhead of $70,000, indicating an overapplied overhead of:

  • Overapplied overhead = $75,000 - $70,000 = $5,000

This amount needs to be prorated among the relevant accounts—Materials, WIP, and Finished Goods—using a method that reflects the most accurate theoretical approach.

Prorating Overallocated Overhead

To allocate the overapplied overhead properly, we adhere to the most theoretically justified method: prorating based on actual overhead costs and actual incurred costs in each account, reflecting the proportionality of costs involved.

The total costs in materials (beginning + purchases): $4,500 + $40,000 = $44,500. The direct materials charged to jobs during 2014 sum to $7,000 + $9,000 + $11,000 + $13,000 + $2,000 = $42,000. For simplicity, total direct costs (materials + labor) for all jobs amount to:

  • Total direct costs = $42,000 (materials) + $62,500 (labor) = $104,500

The proportional overhead allocation based on these costs involves calculating the percentage of each component relative to total costs, then allocating the $5,000 overapplied overhead accordingly.

For instance, Materials control accounts for about 42.7% ($44,500 / $104,500) of total costs, and thus, the overhead proportion allocated would be approximately 42.7% of $5,000, roughly $2,135. Similarly, Work in Process and Finished Goods would receive allocations based on their relative costs.

Applying these proportions yields specific adjustments: Materials control decreases by approximately $2,135, WIP accounts for a certain share, and Finished Goods likewise. This process ensures that the overapplied overhead is fairly distributed in alignment with actual cost accumulation, maintaining accounting integrity.

Comparison of Actual Costing versus Normal Costing

Using actual costing, the overhead rate is calculated as the ratio of actual overhead to actual direct labor costs incurred during 2014:

  • Actual overhead rate = Actual overhead / Actual direct labor cost = $70,000 / $62,500 = 1.12 or 112%

This rate would be applied to each job’s actual direct labor cost to determine actual overhead applied, providing a more precise job costing method that reflects real expenses.

The total balance in ending Work in Process if actual costing were used would depend on the actual overhead applied to uncompleted jobs, such as Job 555, which was underway at year-end. Based on actual overhead rate (112%) and direct labor costs associated with Job 555 ($6,250), the overhead allocated to it would be:

  • Overhead for Job 555 = 1.12 * $6,250 = $7,000

The total work in process includes direct costs plus applied overheads. Summing material, labor, and overhead for ongoing jobs yields an accurate reflection of current WIP balances under actual costing. Comparing these to the corrected balances calculated under normal costing (and after prorating overapplied overhead) reveals whether the two methods result in the same ending balances. Typically, they do not exactly match due to the differences in applying overhead rates, but the disparities should be minimal if calculations are precise and consistent.

Conclusion

This analysis affirms that proper management of overhead variances is vital for maintaining accurate costing and financial reporting. The overallocated overhead of $5,000, when prorated correctly, distributes costs proportionally across inventory accounts, ensuring fair attribution and aiding managerial decision-making. The actual costing rate, calculated as 112%, offers a more precise picture of overhead expenses compared to the predetermined rate used in normal costing. The resulting differences in Work in Process balances under these methods highlight the importance of selecting and applying costing systems that best fit the company's operational realities. Ultimately, consistent application of sound costing principles enhances the company's financial accuracy and operational insight.

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