Question

Gold Nest Company of Guandong, China, is a family-owned enterprise that makes birdcages for the South China market. The company sells its birdcages through an extensive network of street vendors who receive commissions on their sales. The company uses a job-order costing system in which overhead is applied to jobs on the basis of direct labor cost. Its predetermined overhead rate is based on a cost formula that estimated $76,500 of manufacturing overhead for an estimated activity level of $45,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows: Raw materials $ 11,000 Work in process $ 4,100 Finished goods $ 8,100 During the year, the following transactions were completed: Raw materials purchased on account, $ 165,000. Raw materials used in production, $146,000 (materials costing $125,000 were charged directly to jobs; the remaining materials were indirect). Costs for employee services were incurred as follows: Direct labor $ 152,000 Indirect labor $ 175,600 Sales commissions $ 24,000 Administrative salaries $ 42,000 Rent for the year was $18,500 ($13,200 of this amount related to factory operations, and the remainder related to selling and administrative activities). Utility costs incurred in the factory, $18,000. Advertising costs incurred, $12,000. Depreciation recorded on equipment, $25,000. ($17,000 of this amount related to equipment used in factory operations; the remaining $8,000 related to equipment used in selling and administrative activities.) Record the manufacturing overhead cost applied to jobs. Goods that had cost $226,000 to manufacture according to their job cost sheets were completed. Sales for the year (all paid in cash) totaled $505,000. The total cost to manufacture these goods according to their job cost sheets was $216,000. Required: 1. Prepare journal entries to record the transactions for the year. 2. Prepare T-accounts for each inventory account, Manufacturing Overhead, and Cost of Goods Sold. Post relevant data from your journal entries to these T-accounts (don’t forget to enter the beginning balances in your inventory accounts). 3A. Is Manufacturing Overhead underapplied or overapplied for the year? 3B. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold. 4. Prepare an income statement for the year. All of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.

Answer 1

1) Predetermined overhead rate= Estimated total manufacturing overhead/Estimated direct labor

= $76500*100/45000= 170% of direct labor

Transaction	General Journal	Debit	Credit
a.	Raw materials	$165000
	Accounts payable		$165000
	(To record raw materials purchased on account)
b.	Work in process	$125000
	Manufacturing overhead (146000-125000)	$21000
	Raw materials		$146000
	(To record raw materials used in production)
c.	Work in process	$152000
	Manufacturing overhead	$175600
	Sales commissions expense	$24000
	Administrative salaries	$42000
	Cash		$393600
	(To record cost for employee services incurred)
d.	Manufacturing overhead	$13200
	Rent expense (18500-13200)	$5300
	Cash		$18500
	(To record rent)
e.	Manufacturing overhead	$18000
	Accounts payable		$18000
	(To record utility costs incurred)
f.	Advertising expense	$12000
	Accounts payable		$12000
	(To record advertising expense incurred)
g.	Manufacturing overhead	$17000
	Depreciation expense	$8000
	Accumulated depreciation		$25000
	(To record depreciation expense)
h.	Work in process ($152000*170%)	$258400
	Manufacturing overhead		$258400
	(To record manufacturing overhead applied)
i.	Finished goods	$226000
	Work in process		$226000
	(To record jobs transferred to finished goods)
j.	Cash	$505000
	Sales		$505000
	(To record sales)
	Cost of goods sold	$216000
	Finished goods		$216000
	(To record cost of goods sold)

2)

Raw materials					Work in process
Bal.	$11000	(b)	146000		Bal.	$4100	(i)	226000
(a)	165000				(b)	125000
					(c)	152000
Bal.	$30000				(h)	258400
Finished goods					Bal.	$313500
Bal.	$8100	(j)	216000
(i)	226000				Manufacturing overhead
					(b)	21000	(h)	258400
Bal.	$18100				(c)	175600
					(d)	13200
Cost of goods sold					(e)	18000
(j)	216000				(g)	17000
Bal.	216000				Bal.			$13600

3-A) Actual manufacturing overhead= $21000+175600+13200+18000+17000= $244800

Under or overapplied overhead= Manufacturing overhead applied-Actual manufacturing overhead

= $258400-244800= $13600 overapplied overhead

b)

Transaction	General Journal	Debit	Credit
a.	Manufacturing overhead	$13600
	Cost of goods sold		$13600
	(To record overhead applied adjusted to cost of goods sold)

4)

Gold Nest Company
Income Statement
Sales revenue		$505000
Less: Cost of goods sold (216000-13600)		(202400)
Gross profit		302600
Less: Selling and administrative expenses:
Sales commissions expense	24000
Administrative salaries	42000
Rent expense	5300
Advertising expense	12000
Depreciation expense	8000
Total selling and administrative expenses		(91300)
Net operating income		$211300

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