Question

Accounting records for NIC Enterprises (NICE) for September show the following (each entry is the total of the actual entries for the account for the month).

Account Titles	Debit	Credit
Work-in-process Inventory (Direct Labor)	80,000
Wages Payable		80,000
Direct Materials Inventory	1,057,000
Accounts Payable		1,057,000
Finished Goods Inventory	1,520,000
Work-in-process Inventory		1,520,000
Cost of Goods Solda	1,460,000
Finished Goods Inventory		1,460,000

^aThis entry does not include any over- or underapplied overhead. Over- or under applied overhead is written off to Cost of Goods Sold once for the month. For September, the amount written off was 2 percent of overhead applied for September. Overhead is applied on the basis of direct labor costs.

The Work-in-process ending account balance on September 30 was 125 percent of the beginning balance. The direct material ending inventory balance on September 30 was $25,000 less than the beginning balance. The finished goods beginning balance on September 1 was $148,000.

The September income statement shows revenues of $2,300,000 and a gross profit of $850,000.

Required:

a. What was the finished goods inventory on September 30?

b. How much manufacturing overhead was applied for September?

c. What was the manufacturing overhead rate for September?

d. How much manufacturing overhead was incurred for September?

e. What was the Work-in-process beginning inventory balance?

f. What was the Work-in-process ending inventory balance?

Answer 1

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NIC Enterprises (NICE)
Answer a	Amount $	Note
Finished goods balance on September 1	148,000.00
Add: Finished Goods Inventory during the year	1,520,000.00
Less: Finished goods sold	1,460,000.00
Finished goods balance on September 30	208,000.00	A
Answer b	Amount $
Revenues	2,300,000.00
Less: Gross Profit	850,000.00
Cost of goods sold- adjusted	1,450,000.00	B
Less: Cost of goods sold- Unadjusted (as per journal entry)	1,460,000.00	C
Amount written off/ Over applied overhead	10,000.00	D=C-B
Amount written off % of manufacturing overhead applied	2%	E
Manufacturing overhead applied	500,000.00	F=D/E
Answer c	Amount $
Manufacturing overhead applied	500,000.00	See F
Direct Labor cost	80,000.00	G
Manufacturing overhead rate	625.00%	H=F/G
Answer d	Amount $
Manufacturing overhead applied	500,000.00	See F
Less: Amount written off/ Over applied overhead	10,000.00	See D
Manufacturing overhead incurred	490,000.00	I=F-D

Answer e
Work in process beginning + Manufacturing costs=	Work in process ending + Transferred to Finished Goods Inventory
But, Work in process ending =	1.25 x Work in process beginning.
Therefore, Work in process beginning + Manufacturing costs=	1.25 x Work in process beginning + Transferred to Finished Goods Inventory
0.25 x Work in process beginning	Manufacturing costs- Transferred to Finished Goods Inventory
We know the amount of direct labor, but not the amount of direct materials transferred into production. For this, we use the inventory equation for direct materials.
Direct materials beginning + Purchases =	Direct materials ending + Transfers out
Direct materials ending =	Direct materials beginning – $25,000, so
Transfers out = $1,057,000 + $25,000 = $1,082,000.
Again,
0.25 x Work in process beginning =	Manufacturing costs- Transferred to Finished Goods Inventory
0.25 x Work in process beginning =	$1,082,000 (direct materials) + $80,000 (direct labor) + $500,000 (applied manufacturing overhead) – $1,520,000 (transferred out)
So, Work in process beginning = $142,000 ÷ 0.25 = $568,000.

Answer f	Amount $	Note
Work in process beginning	568,000.00	J
Work in process ending	710,000.00	K=J*125%