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 $372,000 of manufacturing overhead for an estimated allocation base of 1,200 direct labor-hours. The following transactions took place during the year:

Raw materials purchased on account, $240,000.

Raw materials used in production (all direct materials), $225,000.

Utility bills incurred on account, $67,000 (95% related to factory operations, and the remainder related to selling and administrative activities).

Accrued salary and wage costs:

Direct labor (1,275 hours)	$	270,000
Indirect labor	$	98,000
Selling and administrative salaries	$	150,000

Maintenance costs incurred on account in the factory, $62,000

Advertising costs incurred on account, $144,000.

Depreciation was recorded for the year, $80,000 (85% related to factory equipment, and the remainder related to selling and administrative equipment).

Rental cost incurred on account, $105,000 (90% 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, $850,000.

Sales for the year (all on account) totaled $1,600,000. These goods cost $880,000 according to their job cost sheets.

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

Raw Materials	$	38,000
Work in Process	$	29,000
Finished Goods	$	68,000

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					240,000
	Accounts payable						240,000
b)	work in process inventory					225,000
	Raw materials inventory						225,000
c)	manufacturing overhead					63650
	utility expense					3350
	Accounts payable						67,000
d)	work in process inventory					270,000
	Manufacturing overhead					98,000
	Salary expense					150,000
	Salary & wages payable						518,000
e)	Manufacturing overhead					62,000
	Accounts payable						62,000
f)	Advertising expense					144,000
	Accounts payable						144,000
g)	Manufacturing overhead					68000
	Depreciation expense					12000
	Accumulated depreciation						80,000
h)	Manufacturing overhead					94500
	Rent expense					10500
	Accounts payable						105,000
i)	Work in process inventory					395,250
	Manufacturing overhead						395,250
j)	finished goods inventory					850,000
	Work in process inventory						850,000
k)	Accounts receivable					1,600,000
	sales						1,600,000
	cost of goods sold					880,000
	finished goods inventory						880,000

Accounts receivable					Sales
Beg.bal					Beg.bal
k.	1,600,000						1,600,000	k.
end bal	1,600,000						1,600,000	end bal
Raw Materials					cost of goods sold
Beg.Bal	38,000				Beg.Bal
a.	240,000	225,000	b.		k.	880,000
End bal	53,000				End bal	880,000
Work in process					Manufacturing overhead
Beg Bal	29,000				Beg.Bal
b.	225,000	850,000	j		c.	63650	395,250	i
d.	270,000				d.	98,000
i.	395250				e.	62,000
					g.	68000
end bal	69,250				h.	94500
							9,100	End bal
finished goods					Advertising expense
Beg bal	68,000				Beg.bal
j	850,000	880,000	k		f.	144,000
End bal	38,000				end bal	144,000
Accumulated Depreciation					Utilities expense
beg.bal					Beg bal
g.		80,000	g.		c.	3350
End bal		80,000			end bal	3,350
Accounts payable					Salaries expense
Beg.bal					Beg.Bal
		240,000	a.		d.	150,000
		67,000	c.
		62,000	e.
		144,000	f.
		105,000	h.
End bal		618,000			end bal	150,000
Depreciation expense					Salaries & wages payable
Beg.bal					Beg.bal
g.	12000						518,000	d.
End bal	12,000				end bal		518,000
rent expense
beg bal
h.	10500
End bal	10,500

	Schedule of Cost of Goods Manufactured
Direct Materials:
Beginning raw materials inventory					38,000
Add:purchase of raw materials					240,000
Total raw materials available					278,000
less:Ending raw materials inventory					53,000
Materials used in production						225,000
Direct Labor						270,000
Manufacturing overhead applied to work in process						395250
total manufacturing costs						890,250
Add:Beginning work in process inventory						29,000
						919,250
less:Ending work in process inventory						69,250
Cost of goods manufactured						850,000
Schedule of Cost of goods sold
Beginning finished goods inventory						68,000
Add:Cost of goods manufactured						850,000
Cost of goods available for sale						918,000
less:ending finished goods inventory						38,000
Unadjusted cost of goods sold						880,000
less:overapplied overhead						9,100
Adjusted cost of goods sold						870,900

Income statement
Sales						1,600,000
cost of goods sold						870,900
Gross margin						729,100
Selling and administrative expense
Utilities expense					3350
Advertising expense					144,000
Salaries expense					150,000
Depreciation expense					12,000
rent expense					10500
						319,850
Net operating income						409,250