• There are three approaches to writing off or allocating overapplied or underapplied overhead. Identify and explain which approach you prefer and why. PDF

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Discussion question answer to the question • There are three approaches to writing off or allocating overapplied or underapplied overhead. Identify and explain which approach you prefer and why....

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DQ 5

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There are three approaches to writing off or allocating overapplied or underapplied overhead. Identify and explain which approach you prefer and why.

The three approaches to writing off or allocating overapplied or underapplied overhead are as follows: - Adjusted allocation-rate approach. Under this method, the amount of over or under-applied overhead is disposed of by allocating it among work in process, finished goods and cost of goods sold accounts based on overhead applied in each of the accounts during the period. All overhead entries in the GL and subsidiary ledgers must be restated using actual cost rates rather than budgeted cost rates. - Proration approach. Under proration approach, under or over-applied overhead is spread among ending work in process inventory, finished goods inventory, and cost of goods sold on the basis of the total amount of manufacturing overhead allocated during the period in the ending balances of Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold. - Write-off to COGS approach. Under this approach, the total under-or overallocated manufacturing overhead is simply included in the period’s Cost of Goods Sold. Out of the 3 approaches adjusted allocation-rate approach provides the most accurate picture because it is based on actual cost. It gives managers better understanding of profitability of each individual job and help in making decisions regarding any future jobs that a company might or might not want to take on. It can, however, be tedious and not worth the time if the difference between actual and allocated overhead is small enough, in which case, it might be better to simply write the balance off to COGS. If only financial statements are needed to be adjusted and managers do not need to reevaluate each individual job, but the difference is rather large, then proration method is the best option.

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Explain how a service business like a hospital or a law firm could benefit by using Job Costing.

Job Costing is the process of tracking costs and revenue for a specific job. It breaks down materials, labor costs, and overhead and helps see if future jobs can reduce costs. Also, it might be used to see if any unexpected additional costs incurred can be passed to the customer. Depending on how long the job takes, managers might have time to control the costs of the project or notify customers about having to increase their bill. Hospitals can benefit from using job costing method because they consider each patient as an individual job and can keep detailed records of each specific job to determine their costs correctly. Companies such as law firms can also utilize job costing to manage individual client accounts. They consider each individual client a job and complete job order cost sheets every day, detailing how lawyers are handling client accounts and how many hours a client's needs take each day. This generates daily costs that the firm can use to determine how much revenue they make each day and how much it costs them....