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 $357,000 of manufacturing overhead for an estimated allocation base of 1,020 direct labor-hours. The following transactions took place during the year:

Raw materials purchased on account, $260,000.

Raw materials used in production (all direct materials), $245,000.

Utility bills incurred on account, $71,000 (80% related to factory operations, and the remainder related to selling and administrative activities).

Accrued salary and wage costs:

Direct labor (1,095 hours)	$	290,000
Indirect labor	$	102,000
Selling and administrative salaries	$	170,000

Maintenance costs incurred on account in the factory, $66,000

Advertising costs incurred on account, $148,000.

Depreciation was recorded for the year, $84,000 (75% related to factory equipment, and the remainder related to selling and administrative equipment).

Rental cost incurred on account, $109,000 (80% related to factory facilities, and the remainder related to selling and administrative facilities).

Manufacturing overhead cost was applied to jobs, $ ? .

Cost of goods manufactured for the year, $890,000.

Sales for the year (all on account) totaled $1,800,000. These goods cost $920,000 according to their job cost sheets.

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

Raw Materials	$	42,000
Work in Process	$	33,000
Finished Goods	$	72,000

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

	Accounting titles & Explanations					Debit	Credit
a)	Raw materials inventory					260,000
	Accounts payable						260,000
b)	work in process inventory					245,000
	Raw materials inventory						245,000
c)	manufacturing overhead					56800
	utility expense					14200
	Accounts payable						71,000
d)	work in process inventory					290,000
	Manufacturing overhead					102,000
	Salary expense					170,000
	Salary & wages payable						562,000
e)	Manufacturing overhead					66,000
	Accounts payable						66,000
f)	Advertising expense					148,000
	Accounts payable						148,000
g)	Manufacturing overhead					63000
	Depreciation expense					21000
	Accumulated depreciation						84,000
h)	Manufacturing overhead					87200
	Rent expense					21800
	Accounts payable						109,000
i)	Work in process inventory					383,250
	Manufacturing overhead						383,250
j)	finished goods inventory					890,000
	Work in process inventory						890,000
k)	Accounts receivable					1,800,000
	sales						1,800,000
	cost of goods sold					920,000
	finished goods inventory						920,000

Accounts receivable					Sales
Beg.bal					Beg.bal
k.	1,800,000						1,800,000	k.
end bal	1,800,000						1,800,000	end bal
Raw Materials					cost of goods sold
Beg.Bal	42,000				Beg.Bal
a.	260,000	245,000	b.		k.	920,000
End bal	57,000				End bal	920,000
Work in process					Manufacturing overhead
Beg Bal	33,000				Beg.Bal
b.	245,000	890,000	j		c.	56800	383,250	i
d.	290,000				d.	102,000
i.	383250				e.	66,000
					g.	63000
end bal	61,250				h.	87200
							8,250	End bal
finished goods					Advertising expense
Beg bal	72,000				Beg.bal
j	890,000	920,000	k		f.	148,000
End bal	42,000				end bal	148,000
Accumulated Depreciation					Utilities expense
beg.bal					Beg bal
g.		84,000	g.		c.	14200
End bal		84,000			end bal	14,200
Accounts payable					Salaries expense
Beg.bal					Beg.Bal
		260,000	a.		d.	170,000
		71,000	c.
		66,000	e.
		148,000	f.
		109,000	h.
End bal		654,000			end bal	170,000
Depreciation expense					Salaries & wages payable
Beg.bal					Beg.bal
g.	21000						562,000	d.
End bal	21,000				end bal		562,000
rent expense
beg bal
h.	21800
End bal	21,800
overhead applied = (357,000/1020)*1095 =					383250
()
	Schedule of Cost of Goods Manufactured
Direct Materials:
Beginning raw materials inventory					42,000
Add:purchase of raw materials					260,000
Total raw materials available					302,000
less:Ending raw materials inventory					57,000
Materials used in production						245,000
Direct Labor						290,000
Manufacturing overhead applied to work in process						383250
total manufacturing costs						918,250
Add:Beginning work in process inventory						33,000
						951,250
less:Ending work in process inventory						61,250
Cost of goods manufactured						890,000
Schedule of Cost of goods sold
Beginning finished goods inventory						72,000
Add:Cost of goods manufactured						890,000
Cost of goods available for sale						962,000
less:ending finished goods inventory						42,000
Unadjusted cost of goods sold						920,000
less:overapplied overhead						8,250
Adjusted cost of goods sold						911,750
Income statement
Sales						1,800,000
cost of goods sold						911,750
Gross margin						888,250
Selling and administrative expense
Utilities expense					14200
Advertising expense					148,000
Salaries expense					170,000
Depreciation expense					21,000
rent expense					21800
						375,000
Net operating income						513,250