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 2016 follow:

Raw Materials Inventory	$	16,400
Work in Process Inventory		6,200
Finished Goods Inventory		20,700

The following transactions occurred during January:
(a) Purchased materials on account for $26,300.
(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 $17,100 were recorded as follows:
    $10,800 for assembly workers
     1,400 for factory supervision
     2,800 for administrative personnel
      2,100 for sales commissions
(d) Recorded depreciation: $5,900 for machines, $1,100 for the copier used in the administrative office.
(e) Recorded $1,000 of expired insurance. Forty percent was insurance on the manufacturing facility, with the remainder classified as an administrative expense.
(f) Paid $5,600 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 this job shows $2,100 for direct materials, $2,200 for direct labor, and $4,400 for applied overhead.
(i) Sold jobs costing $50,500. The revenue earned on these jobs was $65,650.

Required:
1. Set up T-accounts, record the beginning balances, post the January transactions, and compute the final balance for the following accounts: (Post all amounts separately. Do not combine/add any dollar amounts when posting to the t-accounts.)

Raw Materials Inventory.

Work in Process Inventory.

Finished Goods Inventory.

Cost of Goods Sold.

Selling, General, and Administrative Expenses.

Sales Revenue.

Other accounts (Cash, Payables, etc.).

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
	Debit	Credit				Debit	Credit
Beg. Bal.	16400				Beg. Bal.	6200
(a)	26300	20800	(b)		(b)	18720
End. Bal.	21900				(c)	10800
					(g)	21600	48620	(h)
					End. Bal.	8700
Finished Goods Inventory					Cost of Goods Sold (COGS)
	Debit	Credit				Debit	Credit
Beg. Bal.	20700				(i)	50500
(h)	48620	50500	(i)
End. Bal.	18820				End. Bal.	50500
Manufacturing Overhead					Selling, General, Administrative Exp.
	Debit	Credit				Debit	Credit
(b)	2080				(c)	2800
(c)	1400				(c)	2100
(d)	4800				(d)	1100
(e)	400				(e)	600
(f)	5600	21600	(g)
End. Bal.		7320			End. Bal.	6600
Sales Revenue					Other Accounts (Cash, Payables, etc.)
	Debit	Credit				Debit	Credit
		65650	(i)		(i)	65650	26300	(a)
							10800	(c)
End. Bal.		65650					1400	(c)
							2800	(c)
							2100	(c)
							1100	(d)
							4800	(d)
							1000	(e)
							5600	(f)
					End. Bal.	9750

2. Unadjusted gross profit = Sales revenue - Cost of goods sold = $65650 - $50500 = $15150

3. Manufacturing overhead $7320 overapplied

Actual overheads $14280 - Overheads applied $21600 = Overapplied overheads $7320

4. Adjusted gross profit = Sales revenue - Adjusted cost of goods sold = $65650 - $43180 = $22470

Adjusted cost of goods sold = $50500 - $7320 = $43180