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 $95,000 of manufacturing overhead for an estimated activity level of $50,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,500
Work in process	$	4,400
Finished goods	$	8,800

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 169,000.
2. Raw materials used in production, $144,000 (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	$	162,000
Indirect labor	$	232,800
Sales commissions	$	23,000
Administrative salaries	$	43,000

1. Rent for the year was $19,000 ($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, $16,000.
3. Advertising costs incurred, $13,000.
4. Depreciation recorded on equipment, $21,000. ($16,000 of this amount related to equipment used in factory operations; the remaining $5,000 related to equipment used in selling and administrative activities.)
5. Record the manufacturing overhead cost applied to jobs.
6. Goods that had cost $226,000 to manufacture according to their job cost sheets were completed.
7. Sales for the year (all paid in cash) totaled $499,000. The total cost to manufacture these goods according to their job cost sheets was $220,000.

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.

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). (Do not round intermediate calculations.)

	Raw Materials Work in Process Beg. Bal. Beg. Bal.       End. Bal. End. Bal. Finished Goods Manufacturing Overhead Beg. Bal.    Beg. Bal. End. Bal. Cost of Goods Sold End. Bal. Beg. Bal. End. Bal.

• 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.)

  	Gold Nest Company Income Statement For the Year Ended 0 Selling and administrative expenses: 0 $0

• Req 3B

Answer 1

Answer-

Predetermined overhead rate = Estimated manufacturing overhead/Estimated direct labor cost

Predetermined overhead rate =$95,000/50,000 direct labor cost

= $1.90 per direct labor cost

Applied manufacturing overhead cost = Actual direct labor cost* predetermined overhead rate

Applied manufacturing overhead cost= $162,000*1.9

= $307,800

1. Journal Entries

Event	General Journal	Debit	Credit
a.	Raw materials	169,000
	Cash		169,000
	(Raw material purchased)
b.	Work in process	128,000
	Manufacturing overhead	16,000
	Raw materials		144,000
	(Raw materials used in production)
c.	Work in Process	162,000
	Manufacturing Overhead	232,800
	Sales commission expense	23,000
	Salaries expense	43,000
	Cash		460,800
	(Cash paid to employees)
d.	Manufacturing overhead	13,600
	Rent Expense	5,400
	Cash		19,000
	(Cash paid for rent)
e.	Manufacturing overhead	16,000
	Cash		16,000
	(Cash paid for Utility costs)
f.	Advertising expense	13,000
	Cash		13,000
	(Cash paid for advertisement)
g.	Manufacturing overhead	16,000
	Depreciation expense	5,000
	Accumulated Depreciation		21,000
	(Depreciation recorded on equipment)
h.	Work in process	307,800
	Manufacturing overhead		307,800
	(Manufacturing overhead applied)
i.	Finished goods	226,000
	Work in process		226,000
	(Goods manufactured and transferred to finished goods)
j.	Cash	499,000
	Sales revenue		499,000
	(to record sales)
j.2	Cost of goods sold	220,000
	Finished goods		220,000
	(to record cost of goods sold)

2. T-Accounts

Raw material
Debit		Credit
Event	Amount	Event	Amount
Beginning Balance	10,500	b.	144,000
a.	169,000
Closing balance	35,500

Work in process
Debit		Credit
Event	Amount	Event	Amount
Beginning Balance	4,400	i.	226,000
b.	128,000
c.	162,000
h.	307,800
Closing Balance	376,200

Finished Goods
Debit		Credit
Event	Amount	Event	Amount
Beginning Balance	8,800	j.2	220,000
i.	226,000
Closing Balance	14,800

Manufacturing Overhead
Debit		Credit
Event	Amount	Event	Amount
b.	16,000	h.	278,800
c.	232,800
d.	13,600
e.	16,000
g.	16,000
		Closing Balance	15,600

Cost of goods sold
Debit		Credit
Event	Amount	Event	Amount
j.2	220,000
Balance	219,000

3A. Manufacturing Overhead over-applied or under-applied

Manufacturing Overhead cost incurred:	Amount
Indirect materials	16,000
Indirect labor	232,800
Factory rent	13,600
Utility cost	16,000
Depreciation on equipment	16,000
A. Total Manufacturing cost incurred	294,400
B. Manufacturing overhead applied	307,800
C. Over-applied/(Under-applied) {B-A}	13,400

Manufacturing overhead was over-applied from $13,400

3B. Journal Entry to Close any balance in Manufacturing overhead

Event	General Journal	Debit	Credit
Adjustment	Manufacturing Overhead	13,400
	Cost of goods sold		13,400

4. Income Statement

Revised Cost of goods sold balance:

Cost of goods sold = 220,000

Manufacturing overhead over-applied = (13,400)

Revised balance of cost of goods sold = 220,000 -13,400 = $206,600

  

Income Statement
Particulars		Amount
Sales		499,000
Cost of goods sold		(206,600)
Gross Profit		292,400
Operating Expenses:
Sales commission	23,000
Administrative salaries	43,000
Rent expense (19,000-13,600)	5,400
Advertisement expense	13,000
Depreciation expense (21,000-16,000)	5,000
Total Operating Expense		(89,400)
Net Income		203,000