Question

Custer Products manufactures garden tools. It uses a job costing system that allocates factory overhead on the basis of direct labor-costs. Budgeted factory overhead for the year 2018 was $558,000, and management budgeted $372,000 in direct labor costs. The company’s tax rate is 21% (Round income tax to the nearest dollar).

The trial balance of Custer Products, Inc. on April 30 is as follows:

Cash……………………………………………… $23,000

Accounts Receivable…………………………….. 67,000

Finished Goods………………………………….. 101,000

Work in Process…………………………………. 30,000

Materials ………………………………………… 17,000

Prepaid factory Insurance.....……………………… 7,000

Machinery and Equipment (cost)……………… 264,000

Accumulated Depreciation……………………… $70,000

Accounts Payable……………………………….. 97,000

Common Stock……………………………………. 200,000

Retained Earnings……………………………… 142,000

Total ………………………………………… $509,000 $509,000

During May, the following transactions took place:

May 1. Purchased raw materials for $45,000 and factory supplies for $3,000 on account. (Record materials and supplies in the materials control account)

2. Received a $50,000 loan from First National Bank to be repaid in 5 years.

3. Declared a $1,500 cash dividend. 3. Issued raw materials to production, $52,000

5. Paid factory utility bill, $10,230 in cash.

15. Received a bill for May’s janitorial services, $4,500. This amount has not yet been paid.

16. Used factory supplies costing $1,000. (Indirect manufacturing cost).

20. Incurred research & development expense on account, $6,000.

22. Paid other factory overhead costs, $12,500.

23. Incurred selling and administrative expenses on account, $13,250.

28. Paid cash dividend, $1,500.

25. Incurred payroll costs of $45,000 (not yet paid). Of this amount, $30,000 were direct labor costs and $15,000 indirect labor cost.

27. Incurred restructuring costs totaling $15,000 on account.

28. Prepaid factory insurance expired, $1,750.

28. Paid payroll costs, $45,000.

30. Record depreciation for May. Depreciation rate is 10% per annum on the cost of machinery and equipment. One-fifth of this depreciation is for office equipment and the remainder is for factory machinery and equipment.

30. Allocate manufacturing overhead costs to production on the basis of direct labor costs.

31. Completed and transferred goods with a total cost of $95,000 to the finished goods storeroom.

31. Sold goods costing $200,000 for $374,000. (Assume all sales were made on account).

31. Paid accounts payable totaling, $158,000

31. Collected accounts receivable in the amount of $320,000.

31. Accrue $400 interest expense.

31. Calculate the overallocated or underallocated overhead and close this amount to the Cost of Goods Sold account.

Required

1. Compute the company’s factory overhead allocation rate for the year.

2. Prepare a trial balance for May.

3. Prepare a multiple-step income statement and a classified balance sheet for May.

Answer 1

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Part -1	Factory Overhead Allocation rate	558000/372000
	(Budgeted Ovh/Direct Labor Cost)	150%
Part -2	Journal Entries for Trial
Date	Account	Debit	Credit
May 1	Material	$           48,000
May 1	Accounts Payable		$ 48,000
May 2	Cash	$           50,000
May 2	Long Term Loan		$ 50,000
May 3	Dividends	$              1,500
May 3	Dividend Payable		$    1,500
May 3	Work in Process	$           52,000
May 3	Material		$ 52,000
May 5	Factory Overhead	$           10,230
May 5	Cash		$ 10,230
May 15	Factory Overhead	$              4,500
May 15	Accounts Payable		$    4,500
May 16	Factory Overhead	$              1,000
May 16	Material		$    1,000
May 20	Research Expense	$              6,000
May 20	Accounts Payable		$    6,000
May 22	Factory Overhead	$           12,500
May 22	Cash		$ 12,500
May 23	Selling and Admin Expense	$           13,250
May 23	Accounts Payable		$ 13,250
May 28	Dividend Payable	$              1,500
May 28	Cash		$    1,500
May 25	Work in process	$           30,000
May 25	Factory Overhead	$           15,000
May 25	Wages Payable		$ 45,000
May 27	Restructcturing Expense	$           15,000
May 27	Accounts Payable		$ 15,000
May 28	Factory Overhead	$              1,750
May 28	Prepaid Insurance		$    1,750
May 28	Wages Payable	$           45,000
May 28	Cash		$ 45,000
May 30	Factory Overhead	$              1,760
May 30	Depreciation Expsenses - Office	$                 440		1/5
May 30	Accumulated depreciation		$    2,200	264000*10%*1/12
May 31	Work In Process	$           45,000		30000*150%
May 31	Factory Overhead		$ 45,000
May 31	Finished Goods Inventory	$           95,000
May 31	Work In Process		$ 95,000
May 31	Accounts Receivable	$         374,000
May 31	Sale		$374,000
May 31	Cost of Goods Sold	$         200,000
May 31	Finished Goods Inventory		$200,000
May 31	Accounts Payable	$         158,000
May 31	Cash		$158,000
May 31	Cash	$         320,000
May 31	Accounts Receivable		$320,000
May 31	Interest Expense	$                 400
May 31	Interest Payable		$        400
May 31	Cost of Goods sold	$              1,740
May 31	Factory Overhead		$    1,740
	Working for over/under applied:
	Applied Overheads (30000*150%)		$ 45,000
	Less: Actual Overheads
	Utility Bill	$           10,230
	Janitorila service	$              4,500
	Factory Supplies	$              1,000
	Factory Overhead cost	$           12,500
	Indirect Wages	$           15,000
	Insurance	$              1,750
	Depreciation	$              1,760	$ 46,740
	Under Applied Overheads		$    1,740

	April		May		Final
Account	Debit	Credit	Debit	Credit	Debit	Credit
Cash	$ 23,000		$   142,770		$165,770
Accounts Receivable	$ 67,000		$     54,000		$121,000
Finished Goods	$101,000			$105,000	$   -4,000
Work in Process	$ 30,000		$     32,000		$ 62,000
Materials	$ 17,000			$    5,000	$ 12,000
Prepaid Factory Insurance	$    7,000			$    1,750	$    5,250
Machinery and Equipment (cost)	$264,000				$264,000
Accumulated Depreciation		$ 70,000		$    2,200		$ 72,200
Accounts payable		$ 97,000	$     71,250			$ 25,750
Interest Payable				$        400		$        400
Income Tax Payable				$ 28,806		$ 28,806
Long Term Loan				$ 50,000		$ 50,000
Dividends			$        1,500		$    1,500
Common Stock		$200,000				$200,000
Retained Earning		$142,000				$142,000
Sale				$374,000		$374,000
Cost of Goods Sold			$   201,740		$201,740
Selling and Admin Expense			$     13,250		$ 13,250
Depreciation Expsenses - Office			$           440		$        440
Research Expense			$        6,000		$    6,000
Restructcturing Expense			$     15,000		$ 15,000
Interest Expense			$           400		$        400
Income Tax			$     28,806		$ 28,806
Total	$509,000	$509,000	$   567,156	$567,156	$893,156	$893,156
Multi Setp Income Statement:
Sale			$   374,000
Cost of Goods Sold			$   201,740
Gross Margin			$   172,260
Less: Operating Expenses
Selling and Admin Expense		$ 13,250
Depreciation Expsenses - Office		$        440
Research Expense		$    6,000
Restructcturing Expense		$ 15,000
Total Operating Expenses			$     34,690
Net Operating Income			$   137,570
Less: Interest Expense			$           400
Income Before Tax			$   137,170
Less: Income Tax 21%			$     28,806
Net Income			$   108,364
Classified Balance Sheet:
Assets
Current Assets:
Cash			$   165,770
Accounts Receivable			$   121,000
Finished Goods			$      -4,000
Work in Process			$     62,000
Materials			$     12,000
Prepaid Factory Insurance			$        5,250
Total Current Assets			$   362,020
Machinery and Equipment (cost)		$264,000
Accumulated Depreciation		$ -72,200
Machinery and Equipment (Net)			$   191,800
Total Assets			$   553,820
Liabilities
Current Liabilities:
Accounts payable			$     25,750
Interest Payable			$           400
Income Tax Payable			$     28,806
Total Current Liabilities			$     54,956
Long Term Loan			$     50,000
Total Liabilities			$   104,956
Common Stock		$200,000
Retained Earning		$248,864
Total Stockholder's Equity			$   448,864
Total Liabilities and Equity			$   553,820
Statement of Retained Earning:
Beginning Retained Earning		$142,000
Add:Net Income		$108,364
Less: Dividend		$   -1,500
Ending Retained Earning		$248,864