Which accounts are adjusted for the underallocated or overallocated overhead in JIT costing?
Cost of goods sold and conversion cost accounts are used for adjusting under-allocated or over-allocated overhead in JIT costing.
Under JIT costing, the conversion cost is allocated to the finished product as soon as the production gets completed. While allocating the conversion cost, some costs are leftover, or sometimes excessive costs are allocated to the finished goods. This type of allocation creates under-allocation or allocation situations respectively.
These under or over allocations are adjusted at the end of the period.
The under or over-allocated amongst are adjusted into the cost of goods sold account from the conversion cost account.
If there is an under allocation of conversion cost to the finished goods, the COGs account is debited and the conversion cost account is credited.
If there is an over-allotment of conversion cost to the finished goods, the COGS account is credited and the conversion cost account is debited.
Question: Blanchette Plant Service completed a special landscaping job for Kerry Company. Blanchette uses ABC and has the following predetermined overhead allocation rates:
Allocation Base Overhead Allocation Rate
Designing Number of designs $ 290 per design
Planting Number of plants $ 20 per plant
The Kerry job included $750 in plants; $1,300 in direct labor; one design; and 30 plants.
1. What is the total cost of the Kerry job?
The Oakman Company (see Short Exercise S19-1) has refined its allocation system by separating manufacturing overhead costs into two cost pools—one for each department. The estimated costs for the Mixing Department, $510,000, will be allocated based on direct labor hours, and the estimated direct labor hours for the year are 170,000. The estimated costs for the Packaging Department, $300,000, will be allocated based on machine hours, and the estimated machine hours for the year are 40,000. In October, the company incurred 38,000 direct labor hours in the Mixing Department and 10,000 machine hours in the Packaging Department.
1. Compute the predetermined overhead allocation rates. Round to two decimal places.
Question: Roxi, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Roxi’s senior managers expect the engineering work to reduceappraisal, internal failure, and external failure activities. The predicted reductionsin activities over the two-year life of the skateboards follow. Also shown are thepredetermined overhead allocation rates for each activity.
Predicted Reduction in Activity Units
Predetermined Overhead Allocation Rate per unit
Inspection of incoming raw materials
Inspection of finished goods
Number of defective units discovered in-house
Number of defective units discovered by customers
Lost profits due to dissatisfied customers
1. Calculate the predicted quality cost savings from the design engineering work.
2. Roxi spent $106,000 on design engineering for the new skateboard. What is the net benefit of this “preventive” quality activity?
3. What major difficulty would Roxi’s managers have in implementing this costs-of quality approach? What alternative approach could they use to measure quality improvement?
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