Question

Chaos Manufacturing had the following financial information for the year ended December 31 2019:

Inventory Balances:                Beginning                    Ending

Work in Progress                    $ 90,000                      $ 80,000

Finished Goods                       $ 77,000                      $ 67,000

Raw Materials                         $ 10,000                      $ 10,000

During the year, the budgeted and actual costs were as follows:

	Note	Budget	Actual
Raw Materials	1	300,000	290,000
Labour	2	540,000	518,000
Depreciation Factory Equipment		72,000	72,000
Depreciation Office Equipment		24,000	24,000
Building Rent	3	100,000	100,000
Maintenance – Factory Equipment		64,000	40,000
Utilities – Electrical	4	200,000	180,000
Utilities - Gas	5	100,000	90,000
Sales Commissions		40,000	30,000
Advertising		30,000	20,000
Shipping	6	20,000	16,000
Total		1,490,000	1,380,000

Sales for the year were $1,500,000

Note 1 – Raw material

For both budget and actual materials: 90% of raw materials are traced directly to specific jobs, and the remaining 10% of raw materials are used throughout the production process and not traced.  $290,000 in materials were purchased in the year.

Note 2 – Labour

Budget: Direct Labour $300,000 + Factory Salaries $80,000 + Head Office Salaries $160,000 = $540,000

Actual: Direct Labour $270,000 + Factory Salaries $85,000 + Head Office Salaries $163,000 = $518,000

Note 3 – Building Rent

The building is shared between the factory and the administrative office.  68% of the building is related to the factory, and the remaining 32% is related to the administrative office.

Note 4 – Utilities Electrical

For both budget and actual, 90% of these costs are related to the factory, and 10% of these costs are related to the administrative office.

Note 5 – Utilities - Gas

All of the Gas is used to heat production equipment.

Note 6 – Shipping

All of the shipping costs are to ship finished goods to customers

Note 7 – Manufacturing Overhead

The manufacturer uses Normal Costing.  Overhead is allocated based on Direct Labour costs.  Any under/over applied overhead is allocated to Cost of Goods Sold.  

Required:

1. Show the T-accounting for Manufacturing Overhead for the year

2. Prepare an income statement.  You may include a schedule of Cost of Goods Manufactured and Cost of Goods Sold as separate schedules or as part of the Income Statement.

Answer 1

Solution :
Manufacturing Overheads
Working Note:	Budgeted	Actual	General Overheads
Indirect material (10%)	$30000	$29000
Indirect Labor	$80,000	$85,000
Factory Depreciation	$72,000	$72,000
Building Rent - Factory (68%)	$68,000	$68,000	$32,000
Maintainance - Factory equipment	$64,000	$40,000
Utilitis - Electrical (90%)	$180,000	$162,000	$18,000
Utilities - Gas (100%)	$100,000	$90,000
Sales Commission			$30,000
Advertising			$20,000
Shipping			$16,000
Head office salaries			$163,000
Total	$594,000	$546,000	$279,000
Predermined rate       =     Estimated Manufactiring overheads/Direct labor cost
=      $594,000/$300,000   = 1.98 = 198%
1.     Manufacturing Overhead
Indirect material	$29000	Manyfacturing overhead
Indirect Labor	$85,000	Applied	$534,600
Factory Depreciation	$72,000	[$270,000*198%]
Building Rent - Factory	$68,000	Cost of goods sold	$11,400
Maintainance - Factory equipment	$40,000	[Balancing Figure]
Utilitis - Electrical	$162,000
Utilities - Gas	$90,000
Total	$546,000	Total	$546,000
2
Direct Material
Beginnig inventory	$10,000
Add: Purchases	$290,000
Material available for use	$300,000
Less: Ending Inventory	($10,000)
Less: Indirect material	($29,000)
Materials used in production		$261,000
Direct Labor		$270,000
Manufacturing overhead applied		$534,600
Total manufacturing costs		$1,065,600
Add: Beginning Work - in - process		$90,000
Less: Ending work - in - process		($80,000)
Cost of goods manufactured		$1,075,600
Schedule of Cost of goods sold
Beginnig finished goods inventory	$77,000
Add:Cost of goods manufactured	$1,075,600
Goods available for sale	$1,152,600
Less: ending finished goods inventory	($67,000)
Cost of goods sold		$1,085,600
Add: under applied manufacturing O/H		$11,400
Adjusted Cost of goods sold		$1,097,000
Income Statement
Sales		$1,500,000
Less:Cost of goods sold		($1,097,000)
Gross Margin		$403,000
Selling and adminstrative expenses
Sales Commission	$30,000
Advertising	$20,000
Shipping	$16,000
Head office salaries	$163,000	($2,29,000)
Net Income		$174,000
Please Upvote , if found the answer useful.
For any clarification feel free to reach at comment section.