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 $380,000 of manufacturing overhead for an estimated allocation base of 1,000 direct labor-hours. The following transactions took place during the year:

a.Raw materials purchased on account, $220,000.

b.Raw materials used in production (all direct materials), $205,000.

c.Utility bills incurred on account, $63,000 (90% related to factory operations, and the remainder related to selling and administrative activities).

d.Accrued salary and wage costs:

Direct labor (1,075 hours)	$	250,000
Indirect labor	$	94,000
Selling and administrative salaries	$	130,000

e.Maintenance costs incurred on account in the factory, $58,000

f.Advertising costs incurred on account, $140,000.

g.Depreciation was recorded for the year, $88,000 (85% related to factory equipment, and the remainder related to selling and administrative equipment).

h.Rental cost incurred on account, $113,000 (90% related to factory facilities, and the remainder related to selling and administrative facilities).

i.Manufacturing overhead cost was applied to jobs, $ ? .

j.Cost of goods manufactured for the year, $810,000.

k.Sales for the year (all on account) totaled $1,400,000. These goods cost $840,000 according to their job cost sheets.

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

Raw Materials	$	34,000
Work in Process	$	25,000
Finished Goods	$	64,000

REQUIRED:

1. Prepare a schedule of cost of goods manufactured.

2A. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

2B. Prepare a schedule of cost of goods sold.

3. Prepare an income statement for the year.

Answer 1

Solution 1:

Schedule of Cost of Goods Manufactured
Particulars	Details	Amount
Direct Material:
Opening inventory	$34,000.00
Raw Material Purchased	$220,000.00
Ending inventory of raw material (34000 + 220000 - 205000)	-$49,000.00
Raw Material Conusmed		$205,000.00
Direct Labor		$250,000.00
Manufacturing overhead applied (1075*380)		$408,500.00
Opening WIP		$25,000.00
Ending WIP (Balancing Figure)		-$78,500.00
Cost of Goods Manufactured		$810,000.00

Solution 2A:

Computation of manufacturing overhead, Selling & Administrative Expenses
Particulars	Amount
Manufacturing Overhead:
Utility Bills ($63,000*90%)	$56,700.00
Indirect labor	$94,000.00
Factory Maintenance	$58,000.00
Depreciation - factory equipment (88000*85%)	$74,800.00
Rental Cost (113,000*90%)	$101,700.00
Total Manufacturing Overhead	$385,200.00
Selling & Administratvie Expenses:
Utility Bills ($63,000*10%)	$6,300.00
Selling & Administrative Salaries	$130,000.00
Advertising Cost	$140,000.00
Depreciation - selling and adminstrative equipment (88000*15%)	$13,200.00
Rental Cost (113,000*10%)	$11,300.00
Total Selling & Administrative Expenses	$300,800.00

Journal Entry - To close Manufacturing Overhead
Particulars	Debit	Credit
Manufacturing Overhead Dr	$23,300.00
To Cost of Goods Sold ($408,500 - $385,200)		$23,300.00
(Being Overapplied overhead closed to Cost of Goods Sold Account)

Solution 2B:

Schedule of Cost of Goods Sold
Particulars	Details	Amount
Opening inventory	$64,000.00
Cost of goods manufactured	$810,000.00
Ending Inventory - Finished Goods (Balancing Figure)	-$34,000.00
Cost of Goods Sold		$840,000.00
Overapplied manufacturing overhead		-$23,300.00
Net cost of Goods Sold		$816,700.00

Solution 3:

Income Statement
Particulars	Amount
Sales	$1,400,000.00
Cost of Goods Sold	$816,700.00
Gross Profit (Sales - COGS)	$583,300.00
Selling & Adnimistrative Expenses	$300,800.00
Net Income	$282,500.00