Question

Dream Makers is a small manufacturer of gold and platinum jewelry. It uses a job costing system that applies overhead on the basis of direct labor hours. Budgeted factory overhead for the year was $486,500, and management budgeted 35,000 direct labor-hours. The company had no Materials, Work-in-Process, or Finished Goods Inventory at the beginning of April. These transactions were recorded during April: April insurance cost for the manufacturing property and equipment was $1,950. The premium had been paid in January. Recorded $1,130 depreciation on an administrative asset. Purchased 21 pounds of high-grade polishing materials at $16 per pound (indirect materials). The purchase was on credit. Paid factory utility bill, $6,630, in cash. Incurred 4,000 hours and paid payroll costs of $160,000. Of this amount, 1,000 hours and $20,000 were indirect labor costs. Incurred and paid other factory overhead costs, $6,360. Purchased $26,000 of materials. Direct materials included unpolished semiprecious stones and gold. Indirect materials included supplies and polishing materials. The purchase was on credit. Requisitioned $20,000 of direct materials and $1,900 of indirect materials from Materials Inventory. Incurred and paid miscellaneous selling and administrative expenses, $6,080. Incurred $3,820 depreciation on manufacturing equipment for April. Paid advertising expenses in cash, $2,875. Applied factory overhead to production on the basis of direct labor hours. Completed goods costing $65,500 during the month. Made sales on account in April, $60,040. The Cost of Goods Sold was $50,380.

Required:

1. Compute the firm’s predetermined factory overhead rate for the year.

2. Prepare journal entries to record the April events.

3. Calculate the amount of overapplied or underapplied overhead to be closed to the Cost of Goods Sold account on April 30.

4. Prepare a schedule of Cost of Goods Manufactured and a schedule of Cost of Goods Sold.

5. Prepare the income statement for April.

Answer 1

Formula sheet

A	B	C	D	E	F	G	H	I
2
3		1)
4
5		Predetermined overhead rate	=Budgeted Overhead cost / Total Direct Labor hours
6			=$486500/35,000
7			=486500/35000
8
9		Hence Predetermined overhead rate is	=D7	per direct labor hour
10
11		2)
12
13		Journal entries for events during the April will be as follows:
14
15		Insurance cost will be the overhead cost for the company and can be recorded as follows:
16		Account	Debit	Credit
17		Manufacturing Overhead	1950
18		Insurance		=D17
19
20		Depreciation of administrative assets will be administrative expense which is non manufacturing cost.
21		Journal entry for depreciation of administrative assets will be as follows:
22
23		Account	Debit	Credit
24		Depreciation	1130
25		Accumulated Depreciation		=D24
26
27		Journal entry for purchase of indirect materials will be as follows:
28
29		Account	Debit	Credit
30		Raw materials inventory (21*$16)	=21*16
31		Accounts Payable		=D30
32
33		Utility bill will be the overhead cost for the company and can be recorded as follows:
34		Accounts	Debit	Credit
35		Manufacturing Overhead	6630
36		Utility		=D35
37
38		Indirect labor cost will be assigned to manufacturing overhead.
39		Direct labor cost will be assigned to work in progress account.
40
41		Accounts	Debit	Credit
42		Work in process inventory	=E44-D43
43		Manufacturing Overhead	=20000
44		Labor cost		160000
45
46		Journal entry for other factory overhead cost will be as follows:
47		Accounts	Debit	Credit
48		Manufacturing Overhead	6360
49		Other costs		=D48
50
51		Journal entry for purchase of raw materials will be as follows:
52
53		Account	Debit	Credit
54		Raw materials inventory	26000
55		Accounts Payable		=D54
56
57		Journal entry for materials requisitioned will be as follows:
58		Account	Debit	Credit
59		Work in process inventory	20000
60		Manufacturing overhead	1900
61		Raw materials inventory		=D59+D60
62
63		Journal entry for selling and administrative expense will be as follows:
64		Account	Debit	Credit
65		Selling and Administrative expense	6080
66		Cash		=D65
67
68		Depreciation on manufacturing expenses will be assigned to manufacturing overhead as follows:
69		Accounts	Debit	Credit
70		Manufacturing Overhead	3820
71		Depreciation		=D70
72
73		Journal entry for advertising expense will be as follows:
74		Account	Debit	Credit
75		Advertising expense	2875
76		Cash		=D75
77
78		Journal entry to apply factory overhead will be as follows:
79		Account	Debit	Credit
80		Work in process inventory	=E81
81		Manufacturing Overhead (3000 hours*$13.90)		=3000*D7
82
83		Journal entry for finished goods will be as follows:
84		Account	Debit	Credit
85		Finished Goods	65500
86		Work in process inventory		=D85
87
88		Journal entry for Sales
89		Account	Debit	Credit
90		Accounts Receivables	65500
91		Sales Revenue		=D90
92
93		Cost of goods sold	60040
94		Finished goods		=D93
95
96		3)
97
98		Total amount debited to manufacturing overhead	=D17+D35+D43+D48+D60+D70	=D17+D35+D43+D48+D60+D70
99		Total amount credited to manufacturing overhead	=E81	=E81
100
101		Overhead applied is $41,700 whereas actual overhead cost is $40,660.
102
103		Thus overhead is overapplied by	=D99-D98	=D99-D98
104