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 $374,000 of manufacturing overhead for an estimated allocation base of 1,100 direct labor-hours. The following transactions took place during the year:

a. Raw materials purchased on account, $235,000.

b. Raw materials used in production (all direct materials), $220,000.

c. Utility bills incurred on account, $66,000 (90% related to factory operations, and the remainder related to selling and administrative activities).

d. Accrued salary and wage costs:

Direct labor (1,175 hours)	$	265,000
Indirect labor	$	97,000
Selling and administrative salaries	$	145,000

e. Maintenance costs incurred on account in the factory, $61,000

f. Advertising costs incurred on account, $143,000.

g. Depreciation was recorded for the year, $91,000 (80% related to factory equipment, and the remainder related to selling and administrative equipment).

h. Rental cost incurred on account, $116,000 (85% related to factory facilities, and the remainder related to selling and administrative facilities).

i. Manufacturing overhead cost was applied to jobs, $ ? .

j.Cost of goods manufactured for the year, $840,000.

k. Sales for the year (all on account) totaled $1,550,000. These goods cost $870,000 according to their job cost sheets.

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

Raw Materials	$	37,000
Work in Process	$	28,000
Finished Goods	$	67,000

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)

Transaction	General Journal	Debit	Credit
a.	Raw Materials Inventory	$235000
	Accounts Payable		$235000
	(To record materials purchased)
b.	Work in Process Inventory	$220000
	Raw Materials Inventory		$220000
	(To record direct materials used in production)
c.	Manufacturing Overhead ($66000*90%)	$59400
	Utilities Expense ($66000*10%)	$6600
	Accounts Payable		$66000
	(To record utilities bills incurred on account)
d.	Work in Process Inventory	$265000
	Manufacturing Overhead	$97000
	Salaries Expense	$145000
	Salaries and Wages Payable ($265000+97000+145000)		$507000
	(To record salary and wages incurred)
e.	Manufacturing Overhead	$61000
	Accounts Payable		$61000
	(To record maintenance costs incurred on account)
f.	Advertising Expense	$143000
	Accounts Payable		$143000
	(To record advertising costs incurred on account)
g.	Manufacturing Overhead ($91000*80%)	$72800
	Depreciation Expense ($91000*20%)	$18200
	Accumulated Depreciation- Equipment		$91000
	(To record depreciation expense)
h.	Manufacturing Overhead ($116000*85%)	$98600
	Rent Expense ($116000*15%)	$17400
	Accounts Payable		$116000
	(To record rent incurred on account)
i.	Work in Process Inventory ($340*1175)	$399500
	Manufacturing Overhead		$399500
	(To record manufacturing overhead applied)
j.	Finished Goods Inventory	$840000
	Work in Process Inventory		$840000
	(To record work in process transferred to finished goods)
k(1)	Accounts Receivable	$1550000
	Sales		$1550000
	(To record sales on account)
k(2)	Cost of Goods Sold	$870000
	Finished Goods Inventory		$870000
	(To record cost of goods sold)

Predetermined overhead rate= Estimated manufacturing overhead/Estimated direct labor hours

= $374000/1100= $340 per direct labor hour

2)

Accounts Receivable					Sales
Beg. Bal.					Beg. Bal.		1550000	k(1)
k(1)	1550000
End. Bal.	1550000				End. Bal.		1550000
Raw materials					Cost of goods sold
Beg. bal.	$37000	220000	b.		Beg. Bal.
a.	235000				k(2)	870000
End. Bal.	$52000				End. Bal.	870000
Work in process					Manufacturing Overhead
Beg. Bal.	$28000	840000	j.		Beg. Bal.		399500	i.
b.	220000				c.	59400
d.	265000				d.	97000
i.	399500				e.	61000
					g.	72800
End. Bal.	$72500				h.	98600
					End. Bal.		10700
Finished goods					Advertising expense
Beg. Bal.	$67000	870000	k(2)		Beg. Bal.
j.	840000				f.	143000
End. Bal.	$37000				End. Bal.	143000
Accumulated Depreciation					Utilities Expense
Beg. Bal.		91000	g.		Beg. Bal.
					c.	6600
End. Bal.		91000			End. Bal.	6600
Accounts Payable					Salaries Expense
Beg. Bal.		235000	a.		Beg. Bal.
		66000	c.		d.	145000
		61000	e.
		143000	f.		End. Bal.	145000
		116000	h.
End. Bal.		621000
Depreciation expense					Salaries & wages payable
Beg. Bal.					Beg. Bal.		507000	d.
g.	18200
End. Bal.	18200				End. Bal.		507000
Rent expense
Beg. Bal.
h.	17400
End. Bal.	17400

3.

Schedule of Cost of Goods Manufactured
Direct materials:
Beginning raw materials inventory	$37000
Add: Purchase of raw materials	235000
Total raw materials available	272000
Less: Ending raw materials inventory	52000
Materials used in production		220000
Direct labor		265000
Manufacturing overhead applied		399500
Total manufacturing costs		884500
Add: Beginning work in process inventory		28000
Total cost of work in process		912500
Less: Ending work in process inventory		72500
Cost of goods manufactured		$840000

4-A)

Transaction	General Journal	Debit	Credit
	Manufacturing overhead	$10700
	Cost of goods sold		$10700
	(To record overapplied overhead close to cost of goods sold)

b)

Schedule of Cost of goods sold
Beginning finished goods inventory	$67000
Add: Cost of goods manufactured	840000
Cost of goods available for sale	907000
Less: Ending finished goods inventory	37000
Unadjusted cost of goods sold	870000
Less: Overapplied overhead	10700
Adjusted cost of goods sold	$859300

5)

Income Statement
Sales		$1550000
Less: Cost of goods sold		859300
Gross profit		690700
Less: Selling and administrative expenses
Utilities expense	6600
Salaries expense	145000
Advertising expense	143000
Depreciation expense	18200
Rent expense	17400
Total selling and administrative expenses		330200
Net operating income		$360500

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