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 $378,000 of manufacturing overhead for an estimated allocation base of 900 direct labor-hours. The following transactions took place during the year:

Raw materials purchased on account, $285,000.

Raw materials used in production (all direct materials), $270,000.

Utility bills incurred on account, $76,000 (85% related to factory operations, and the remainder related to selling and administrative activities).

Accrued salary and wage costs:

Direct labor (950 hours)	$	315,000
Indirect labor	$	107,000
Selling and administrative salaries	$	195,000

Maintenance costs incurred on account in the factory, $71,000

Advertising costs incurred on account, $153,000.

Depreciation was recorded for the year, $89,000 (70% related to factory equipment, and the remainder related to selling and administrative equipment).

Rental cost incurred on account, $114,000 (75% 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, $940,000.

Sales for the year (all on account) totaled $2,050,000. These goods cost $970,000 according to their job cost sheets.

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

Raw Materials	$	47,000
Work in Process	$	38,000
Finished Goods	$	77,000

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

Predetermined overhead rate =$378,000/900 direct labor-hours= $420

1. Journal Entries to record the transactions -

a) Dr Raw Materials $285,000

Cr Accounts Payable $285,000

b) Dr Work In Progress $270,000

Cr Raw Materials $270,000

c) Dr Manufacuring Overhead $64,600

Dr Selling and Adminstrative Overhead $11,400

Cr Accounts Payable $76,000

d) Dr Work In Progress $315,000

Dr Manufacturing Overheads $107,000

Dr Selling and Administrative Overheads $195,000

Cr Salaries and Wages Payable $617,000

e) Dr Manufacturing Overheads $71,000

Cr Accounts Payable $71,000

f) Dr Advertising Expenses $153,000

Cr Accounts Payable $153,000

g) Dr Manufacuring Overheads $62,300

Dr Depreciation Expenses $26,700

Cr Accumulated Depreciation $89,000

h) Dr Manufacturing Overheads $85,500

Dr Rent Expenses $28,500

Cr Accounts Payable $114,000

i) Dr Work in Progress $399,000

Cr Manufacturing Overhead $399,000

($420 x 950 hours)

j) Dr Finished Goods $940,000

Cr Work in Progress $940,000

k - i) Dr Accounts Receivable $2,050,000

Cr Sales $2,050,000

k - ii) Dr Cost of Goods Sold $970,000

Cr Finished Goods $970,000

3) Schedule of Cost of Goods Manufactured :

Direct Materials :

Raw Material Inventory, beginning - $47,000

Add: Purchases of Raw Material - $285,000

Total Raw Material Available - $332,000

Deduct : Raw Materials Inventory, endind - $62,000

Raw Material used in Production - 270,000

Direct Labour - $315,000

Manufacturing Overhead Applied to Work in Progress - $399,000

Total Manufacturing Costs - 984,000

Add: Beginning Work in Progress Inventory - $38,000

Deduct: Ending Work in Progress Inventory - $82,000

Cost of Goods Manufactured : 940,000

4) Schedule for Cost of Goods Sold -

Finished Goods Inventory, Beginning - $77,000

Add: Cost of Goods Manufactured - $940,000

Goods Available for Sale - $1,017,000

Deduct: Finished Goods Inventory, Ending - $47,000

Cost of Goods Sold - $970,000

5) Income Statement -

Sales - $2,050,000

Less: Cost of Goods Sold - 970,000

Gross Margin - $1,080,000

Less: Selling and Administrative Expenses - $206,400

Advertising - $153,000

Depreciation - $26,700

Rent - $28,500

Net Income - $665,400