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 $360,000 of manufacturing overhead for an estimated allocation base of 900 direct labor-hours. The following transactions took place during the year:

1. Raw materials purchased on account, $200,000.
2. Raw materials used in production (all direct materials), $185,000.
3. Utility bills incurred on account, $70,000 (90% related to factory operations, and the remainder related to selling and administrative activities).
4. Accrued salary and wage costs:

Direct labor (975 hours)	$	230,000
Indirect labor	$	90,000
Selling and administrative salaries	$	110,000

1. Maintenance costs incurred on account in the factory, $54,000.
2. Advertising costs incurred on account, $136,000.
3. Depreciation was recorded for the year, $95,000 (80% related to factory equipment, and the remainder related to selling and administrative equipment).
4. Rental cost incurred on account, $120,000 (85% related to factory facilities, and the remainder related to selling and administrative facilities).
5. Manufacturing overhead cost was applied to jobs, $ ? .
6. Cost of goods manufactured for the year, $770,000.
7. Sales for the year (all on account) totaled $1,200,000. These goods cost $800,000 according to their job cost sheets.

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

Raw Materials	$	30,000
Work in Process	$	21,000
Finished Goods	$	60,000

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

1)

Event	Account titles and explanation	Debit	Credit
a.	Raw Materials Inventory	$200000
	Accounts Payable		$200000
	(To record materials purchased)
b.	Work in Process Inventory	$185000
	Raw Materials Inventory		$185000
	(To record direct materials used in production)
c.	Manufacturing Overhead ($70000*90%)	$63000
	Utilities Expense ($70000*10%)	$7000
	Accounts Payable		$70000
	(To record utilities bills incurred on account)
d.	Work in Process Inventory	$230000
	Manufacturing Overhead	$90000
	Salaries Expense	$110000
	Salaries and Wages Payable ($230000+90000+110000)		$430000
	(To record salary and wages incurred)
e.	Manufacturing Overhead	$54000
	Accounts Payable		$54000
	(To record maintenance costs incurred on account)
f.	Advertising Expense	$136000
	Accounts Payable		$136000
	(To record advertising costs incurred on account)
g.	Manufacturing Overhead ($95000*80%)	$76000
	Depreciation Expense ($95000*20%)	$19000
	Accumulated Depreciation : Equipment		$95000
	(To record depreciation expense)
h.	Manufacturing Overhead ($120000*85%)	$102000
	Rent Expense ($120000*15%)	$18000
	Accounts Payable		$120000
	(To record rent incurred on account)
i.	Work in Process Inventory ($360000/900*975)	$390000
	Manufacturing Overhead		$390000
	(To record manufacturing overhead applied)
j.	Finished Goods Inventory	$770000
	Work in Process Inventory		$770000
	(To record work in process transferred to finished goods)
k(1)	Accounts Receivable	$1200000
	Sales		$1200000
	(To record sales on account)
k(2)	Cost of Goods Sold	$800000
	Finished Goods Inventory		$800000
	(To record cost of goods sold)

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

= $336000/1050= $320 per direct labor hour

2)

Accounts Receivable					Sales
Beg. bal.	$0				Beg. bal.	$0
k(1)	$1200000						$1200000	k(1)
End. Bal.	$1200000				End. Bal.		$1200000
Raw materials					Cost of goods sold
Beg. bal.	$30000				Beg. bal.	$0
a.	200000	185000	b.		k(2)	$800000
					End. Bal.	$800000
End. bal.	$45000
Work in process					Manufacturing Overhead
Beg. Bal.	$21000	770000	j.		Beg. Bal.
b.	185000				c.	63000	390000	i.
d.	230000				d.	90000
i.	390000				e.	54000
					g.	76000
End. Bal.	$56000				h.	102000
					End. Bal.		5000
Finished goods					Advertising expense
Beg. Bal.	$60000				Beg. Bal.
j.	770000	800000	k(2)		f.	$136000
					End. Bal.	$136000
End. Bal.	$30000
Accumulated Depreciation					Utilities Expense
Beg. Bal.					Beg. Bal.
		$95000	g.		c.	$7000
End. Bal.		$95000			End. Bal.	$7000
Accounts Payable					Salaries Expense
Beg. Bal.					Beg. Bal.
		200000	a.		d.	$110000
		7000	c.
		54000	e.		End. Bal.	$110000
		136000	f.
		120000	h.
End. Bal.		517000
Depreciation expense					Salaries & wages payable
Beg. Bal.					Beg. Bal.	$430000
g.	$19000							d.
End. Bal.	$19000				End. Bal.	$430000
Rent expense
Beg. Bal.
h.	$18000
End. Bal.	$18000

3.

Froya Fabrikker A/S
Schedule of Cost of Goods Manufactured
Direct materials:
Beginning raw materials inventory	$30000
Add: Purchase of raw materials	200000
Total raw materials available	230000
Less: Ending raw materials inventory	(45000)
Raw materials used in production		185000
Direct labor		230000
Manufacturing overhead applied		390000
Total manufacturing costs		805000
Add: Beginning work in process inventory		21000
Total cost of work in process		826000
Less: Ending work in process inventory		(56000)
Cost of goods manufactured		$770000

4-A)

Event	Account titles and explanation	Debit	Credit
	Manufacturing overhead	$5000
	Cost of goods sold		$5000
	(To record overapplied manufacturing overhead close to cost of goods sold)

b)

Froya Fabrikker A/S
Schedule of Cost of goods sold
Beginning finished goods inventory	$60000
Add: Cost of goods manufactured	770000
Cost of goods available for sale	830000
Less: Ending finished goods inventory	(30000)
Unadjusted cost of goods sold	800000
Less: Overapplied overhead	(5000)
Adjusted cost of goods sold	$795000

5)

Froya Fabrikker A/S
Income Statement
Sales		$1200000
Less: Cost of goods sold		(795000)
Gross profit		405000
Less: Selling and administrative expenses
Utilities expense	7000
Salaries expense	110000
Advertising expense	136000
Depreciation expense	19000
Rent expense	18000
Total selling and administrative expenses		(290000)
Net operating income		$115000