4-2: Taymag produces two products, a washer and a dryer (both for clothes). For product costing purposes, an overhead application rate of $1.70 per direct labour hour was used, based on budgeted overhead of $340,000 and budgeted direct labour hours, as follows:

Budgeted Overhead Budgeted Hours
Washer department $240,000 100,000
Dryer department 100,000 100,000
Total $340,000 200,000

At the end of the year there was no work in progress and there were 2,000 and 6,000 finished units, respectively, of washers and dryers on hand. Assume actuals equaled the budgeted activity. Labour hours were 5 per units for both washers and dryers. All other costs were $100 per unit for both washers and dryers (i.e. total cost of each is $100 plus overhead applied).

Required:
1. Calculate ending inventory for washers and dryers using the current plant-wide allocation policy.
2. Re-calculate ending inventory if the company allocated overhead based on overhead per direct labour hour based on the overhead and direct labour hours within the department (it will be different for each department now).
3. *Bonus question (extra full mark available): You should now have ending inventories that differ for 1. and 2. by $14,000. So in Inventory on the balance sheet, inventory will be $14,000 more using the plant-wide allocation method. Where did the $14,000 reduction from using the department allocation method go? What line item on what financial statement? What is the accounting debit and credit for this?
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