4.7.4: Write-Off to Cost of Goods Sold Approach

Write-Off to Cost of Goods Sold Approach

Under the write-off approach, the total under- or overallocated manufacturing overhead is included in this year’s Cost of Goods Sold expense. For Robinson, the journal entry would be as follows:

Cost of Goods Sold: 135,000 dollars

Manufacturing Overhead Allocated: 1,080,000 dollars

Manufacturing Overhead Control: 1,215,000 dollars

Robinson’s two Manufacturing Overhead accounts—Manufacturing Overhead Control and Manufacturing Overhead Allocated—are closed with the difference between them included in Cost of Goods Sold. The Cost of Goods Sold account after the write-off equals $2,510,000, the balance before the write-off of $2,375,000 plus the underallocated manufacturing overhead amount of $135,000. This results in operating income decreasing by $135,000.

Try It! 4-4

Huckvale Corporation manufactures custom cabinets for kitchens. It uses a normal-costing system with two direct-cost categories—direct materials and direct manufacturing labor—and one indirect-cost pool, manufacturing overhead costs. It provides the following information about manufacturing overhead costs for 2020.

Budgeted manufacturing overhead costs: 1,160,000 dollars

Budgeted direct manufacturing labor-hours: 29,000 hours

Actual manufacturing overhead costs: 1,260,000 dollars

Actual direct manufacturing labor-hours: 28,000 hours

The following information is available as of December 31, 2020.

The table depicts account balance (before proration) and manufacturing overhead in each account balance allocated in the current year (before proration) for work-in-progress control, finished goods control, and cost of goods sold accounts, as well as the totals. The details of the table are as follows:

1. Work-in-Process Control

Account balance (before proration): 45,000 dollars
Manufacturing overhead in each account balance allocated in the current year (before proration): 29,000 dollars

2. Finished Goods Control

Account balance (before proration): 65,000 dollars
Manufacturing overhead in each account balance allocated in the current year (before proration): 63,800 dollars

3. Cost of Goods Sold

Account balance (before proration): 1,600,000 dollars
Manufacturing overhead in each account balance allocated in the current year (before proration): 1,067,200 dollars

4. Total

Account balance (before proration): 1,710,000 dollars
Manufacturing overhead in each account balance allocated in the current year (before proration): 1,160,000 dollars

Calculate the underallocated or overallocated manufacturing overhead at the end of 2020 and prorate it to Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold accounts based on the allocated manufacturing overhead in each account balance using normal costing.