Question

Christopher’s Custom Cabinet Company uses a job order cost system with overhead applied as a percentage of direct labor costs. Inventory balances at the beginning of 2018 follow:

Raw Materials Inventory: 15,700

Work in Process: 6,000

Finished Goods Inventory: 20,100

The following transactions occurred during January:

(a) Purchased materials on account for $26,900.
(b) Issued materials to production totaling $20,800, 90 percent of which was traced to specific jobs and the remainder of which was treated as indirect materials.
(c) Payroll costs totaling $20,600 were recorded as follows:
    $12,000 for assembly workers
     3,000 for factory supervision
     2,900 for administrative personnel
      2,700 for sales commissions
(d) Recorded depreciation: $5,800 for factory machines, $1,000 for the copier used in the administrative office.
(e) Recorded $1,700 of expired insurance. Forty percent was insurance on the manufacturing facility, with the remainder classified as an administrative expense.
(f) Paid $5,300 in other factory costs in cash.
(g) Applied manufacturing overhead at a rate of 200 percent of direct labor cost.
(h) Completed all jobs but one; the job cost sheet for the uncompleted job shows $2,400 for direct materials, $2,100 for direct labor, and $4,200 for applied overhead.
(i) Sold jobs costing $51,200. The revenue earned on these jobs was $66,560.

Required:
1. Set up T-accounts, record the beginning balances, post the January transactions, and compute the final balance for the following accounts:

1. Raw Materials Inventory.
2. Work in Process Inventory.
3. Finished Goods Inventory.
4. Cost of Goods Sold.
5. Manufacturing Overhead.
6. Selling, General, and Administrative Expenses.
7. Sales Revenue.

2. Determine how much gross profit the company would report during the month of January before any adjustment is made for the overhead balance.

3. Determine the amount of over- or underapplied overhead.

4. Compute adjusted gross profit assuming that any over- or underapplied overhead balance is adjusted directly to Cost of Goods Sold.

Answer 1

1.

Raw Materials Inventory					Work in Process Inventory
Beg. Bal.	15700				Beg. Bal.	6000
(a)	26900	20800	(b)		(b)	18720	52020	(h)
End. Bal.	21800				(c)	12000
					(g)	24000
					End. Bal.	8700
Finished Goods Inventory					Cost of Goods Sold (COGS)
Beg. Bal.	20100				Beg. Bal.	0
(h)	52020	51200	(i)		(i)	51200
End. Bal.	20920				End. Bal.	51200
Manufacturing Overhead					Selling, General, Administrative Exp.
Beg. Bal.	0				Beg. Bal.	0
(b)	2080	24000	(g)		(c)	2900
(c)	3000				(c)	2700
(d)	5800				(d)	1000
(e)	680				(e)	1020
(f)	5300
End. Bal.		7140			End. Bal.	7620
Sales Revenue
Beg. Bal.		0
		66560	(i)
End. Bal.		66560

2. Gross profit = Sales revenue - Cost of goods sold = $66560 - $51200 = $15360

3. Manufacturing overhead $7140 overapplied

Actual overheads $16860 - Overheads applied $24000 = Overapplied overheads $7140

4. Adjusted gross profit = Sales revenue - Adjusted cost of goods sold = $66560 - ($51200 - $7140) = $66560 - $44060 = $22500