Question

Froya Fabrikker A/S of Bergen, Norway, is a small company that manufactures specialty heavy equipment for use in North Sea oil fields. The company uses a job-order costing system that applies manufacturing overhead cost to jobs on the basis of direct labor-hours. Its predetermined overhead rate was based on a cost formula that estimated $336,000 of manufacturing overhead for an estimated allocation base of 1,050 direct labor-hours. The following transactions took place during the year:

1. Raw materials purchased on account, $225,000.
2. Raw materials used in production (all direct materials), $210,000.
3. Utility bills incurred on account, $58,000 (95% related to factory operations, and the remainder related to selling and administrative activities).
4. Accrued salary and wage costs:

Direct labor (1,125 hours)	$	255,000
Indirect labor	$	95,000
Selling and administrative salaries	$	135,000

5. Maintenance costs incurred on account in the factory, $59,000
6. Advertising costs incurred on account, $141,000.
7. Depreciation was recorded for the year, $89,000 (70% related to factory equipment, and the remainder related to selling and administrative equipment).
8. Rental cost incurred on account, $114,000 (75% related to factory facilities, and the remainder related to selling and administrative facilities).
9. Manufacturing overhead cost was applied to jobs, $ ? .
10. Cost of goods manufactured for the year, $820,000.
11. Sales for the year (all on account) totaled $1,450,000. These goods cost $850,000 according to their job cost sheets.

The balances in the inventory accounts at the beginning of the year were:

Raw Materials	$	35,000
Work in Process	$	26,000
Finished Goods	$	65,000

Required:

1. Prepare journal entries to record the preceding transactions.

2. Post your entries to T-accounts. (Don’t forget to enter the beginning inventory balances above.)

3. Prepare a schedule of cost of goods manufactured.

4A. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

4B. Prepare a schedule of cost of goods sold.

5. Prepare an income statement for the year.

Answer 1

1) Journal Entries:
Date	Accounts Title	Debit $	Credit $
	Raw Mat	225000
	Accounts Payable		225000
	(being RM purchased on credit)
	WIP	210000
	Raw Mat		210000
	(Being RM used in production)
	Manuf Overhead	55100
	Selling & Admin	2900
	Accounts Payable		58000
	(being utility expenses utilisation)
	WIP	255000
	Manuf Overhead	95000
	Selling & Admin	135000
	Labor Payroll		485000
	(being payroll utilised)
	Manuf Overhead	59000
	Accounts Payable		59000
	(being maintenance cost incurred)
	Selling & Admin	141000
	Accounts Payable		141000
	(being Advertising expenses incurred)
	Manuf Overhead	62300
	Selling & Admin	26700
	Depreciation expe		89000
	(being depre exp. Distributed)
	Manuf Overhead	85500
	Selling & Admin	28500
	Rent expense		114000
	(being rent cost incurred)
	WIP	360000
	Manuf Overhead		360000
	(Manuf. Overhead cost applied @ 336000/1050=320)
	FG Inventory	820000
	WIP		820000
	(being Finished Goods booked)
	Accounts Receivable	1450000
	Sales Revenue		1450000
	(being sales booked)
	COGS	850000
	FG Inventory		850000
	(being COGS booked)

2) t-Accounts:
DEBIT	AMOUNT $	CREDIT	AMOUNT $
RM a/c
OB	35000	WIP	210000
PURCH	225000	CB	50000
WIP a/c
OB	26000	FG Inventory	820000
RM	210000	CB	31000
DL	255000
M O/H	360000
F G Inventory a/c
OB	65000	COGS	850000
WIP	820000	CB	35000
Manuf. Overhead a/c
Utility exp	55100	WIP	360000
Payroll	95000
Maintenance	59000
Dep	62300
rent	85500
COGS	3100
Total	360000	Total	360000
Selling & Admin exp. a/c
Utility exp	2900	Income Summary	334100
Payroll	135000
Advertising	141000
Dep	26700
Rent	28500
Total	334100
3) Schedule of COGM:
RM:
ob	35000
Purchase	225000
RM available	260000
less:cb	50000
RM used		210000
DL used		255000
M O/h		360000
Total cost incurred		825000
Add: WIP OB		26000
Total WIP		851000
Less: WIP CB		31000
COGM		820000
4A)	DEBIT $	CREDIT $
Manuf. Overhead	3100
COGS		3100
(Being M o/h overapplied ended to COGS)
4B) schedule of COGS:
OB - FG	65000
Add: WIP	820000
FG available	885000
Less: CB - FG	-35000
COGS	850000
5) Income Statement:
Sales	1450000
Less: COGS	850000
GP	600000
Less: S&A expenses	334100
NOI	265900