Question

Gold Nest Company of Guandong, China, is a family-owned enterprise that makes birdcages for the South China market. The company sells its birdcages through an extensive network of street vendors who receive commissions on their sales.

The company uses a job-order costing system in which overhead is applied to jobs on the basis of direct labor cost. Its predetermined overhead rate is based on a cost formula that estimated $84,000 of manufacturing overhead for an estimated activity level of $40,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,400
Work in process	$	4,000
Finished goods	$	8,800

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 165,000.
2. Raw materials used in production, $141,000 (materials costing $128,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	152,000
Indirect labor	$	251,000
Sales commissions	$	21,000
Administrative salaries	$	48,000

1. Rent for the year was $18,600 ($13,600 of this amount related to factory operations, and the remainder related to selling and administrative activities).
2. Utility costs incurred in the factory, $11,000.
3. Advertising costs incurred, $11,000.
4. Depreciation recorded on equipment, $24,000. ($16,000 of this amount related to equipment used in factory operations; the remaining $8,000 related to equipment used in selling and administrative activities.)
5. Record the manufacturing overhead cost applied to jobs.
6. Goods that had cost $225,000 to manufacture according to their job cost sheets were completed.
7. Sales for the year (all paid in cash) totaled $498,000. The total cost to manufacture these goods according to their job cost sheets was $216,000.

Required:

1. Prepare journal entries to record the transactions for the year.

2. Prepare T-accounts for each inventory account, Manufacturing Overhead, and Cost of Goods Sold. Post relevant data from your journal entries to these T-accounts (don’t forget to enter the beginning balances in your inventory accounts).

3A. Is Manufacturing Overhead underapplied or overapplied for the year?

3B. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

4. Prepare an income statement for the year. All of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.

Question2

Problem 3-17 Cost Flows; T-Accounts; Income Statement [LO3-2, LO3-3, LO3-4]

Supreme Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1, are given below.

Supreme Videos, Inc. Balance Sheet January 1
Assets
Current assets:
Cash				$	67,000
Accounts receivable					106,000
Inventories:
Raw materials (film, costumes)	$	34,000
Videos in process		30,000
Finished videos awaiting sale		85,000			149,000
Prepaid insurance					9,800
Total current assets					331,800
Studio and equipment		738,000
Less accumulated depreciation		214,000			524,000
Total assets				$	855,800
Liabilities and Stockholders' Equity
Accounts payable				$	157,800
Capital stock	$	424,000
Retained earnings		274,000			698,000
Total liabilities and stockholders' equity				$	855,800

  

Because the videos differ in length and in complexity of production, the company uses a job-order costing system to determine the cost of each video produced. Studio (manufacturing) overhead is charged to videos on the basis of camera-hours of activity. The company’s predetermined overhead rate for the year is based on a cost formula that estimated $352,000 in manufacturing overhead for an estimated allocation base of 8,000 camera-hours. The following transactions occurred during the year:

1. Film, costumes, and similar raw materials purchased on account, $189,000.
2. Film, costumes, and other raw materials used in production, $204,000 (80% of this material was considered direct to the videos in production, and the other 20% was considered indirect).
3. Utility costs incurred on account in the production studio, $76,000.
4. Depreciation recorded on the studio, cameras, and other equipment, $88,000. Three-fourths of this depreciation related to production of the videos, and the remainder related to equipment used in marketing and administration.
5. Advertising expense incurred on account, $134,000.
6. Costs for salaries and wages were incurred on account as follows:

Direct labor (actors and directors)	$	86,000
Indirect labor (carpenters to build sets, costume designers, and so forth)	$	114,000
Administrative salaries	$	99,000

1. Prepaid insurance expired during the year, $7,400 (75% related to production of videos, and 25% related to marketing and administrative activities).
2. Miscellaneous marketing and administrative expenses incurred on account, $9,000.
3. Studio (manufacturing) overhead was applied to videos in production. The company used 8,200 camera-hours during the year.
4. Videos that cost $554,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.
5. Sales for the year totaled $933,000 and were all on account. The total cost to produce these videos according to their job cost sheets was $604,000.
6. Collections from customers during the year totaled $854,000.
7. Payments to suppliers on account during the year, $504,000; payments to employees for salaries and wages, $289,000.

Required:

1. Prepare a T-account for each account on the company’s balance sheet and enter the beginning balances.

2. Record the transactions directly into the T-accounts. Key your entries to the letters (a) through (m) above.

3. Is the Studio (manufacturing) Overhead account underapplied or overapplied for the year? By how much?

4. Prepare a schedule of cost of goods manufactured.

5. Prepare a schedule of cost of goods sold.

6. Prepare an income statement for the year.

Answer 1

Answer to first question only as per Answering Guidelines