Question

Star Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1 are given below.

Star Videos, Inc.
Balance Sheet
January 1
Assets
Cash				$	89,200
Accounts receivable					106,600
Inventories:
Raw materials (film, costumes)	$	13,400
Videos in process		47,400
Finished videos awaiting sale		80,400			141,200
Prepaid insurance					8,350
Studio and equipment (net)					610,000
Total assets				$	955,350
Liabilities and Stockholders’ Equity
Accounts payable				$	238,000
Retained earnings					717,350
Total liabilities and stockholders’ equity				$	955,350

Because the videos differ in length and in complexity of production, the company uses a job-order costing system to determine the cost of each video produced. Studio (manufacturing) overhead is charged to videos on the basis of camera-hours of activity. The company’s predetermined overhead rate for the year ($40 per camera-hour) is based on a cost formula that estimated $280,000 in manufacturing overhead for an estimated allocation base of 7,000 camera-hours. Any underapplied or overapplied overhead is closed to cost of goods sold. The following transactions were recorded for the year:

Film, costumes, and similar raw materials purchased on account, $229,000.

Film, costumes, and other raw materials issued to production, $230,500 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect).

Utility costs incurred (on account) in the production studio, $92,600.

Depreciation recorded on the studio, cameras, and other equipment, $104,400. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration.

Advertising expense incurred (on account), $143,000.

Salaries and wages paid in cash as follows:

Direct labor (actors and directors)	$	96,000
Indirect labor (carpenters to build sets, costume designers, and so forth)	$	75,500
Administrative salaries	$	103,000

Prepaid insurance expired during the year, $7,450 (70% related to production of videos, and 30% related to marketing and administrative activities).

Miscellaneous marketing and administrative expenses incurred (on account), $13,850.

Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year.

Videos that cost $578,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.

Sales for the year totaled $954,000 and were all on account.

The total cost to produce the videos that were sold according to their job cost sheets was $623,910.

Collections from customers during the year totaled $904,000.

Payments to suppliers on account during the year, $608,000.

Underapplied or overapplied overhead $__?__.

Required:

1. Prepare a transaction analysis that records all of the above transactions.

2. Prepare a schedule of cost of goods manufactured for the year.

3. Prepare a schedule of cost of goods sold for the year.

4. Prepare an income statement for the year.

Answer 1

1.

Star Videos, Inc.
Transaction Analysis
For the Year Ended December 31
	Cash	Accounts Receivable	Raw Materials	Videos in Process	Finished Videos	Manufacturing Overhead	Prepaid Insurance	Studio & Equipment (net)	=	Accounts Payable	Retained Earnings
Beginning balance @ 1/1	89200	106600	13400	47400	80400	0	8350	610000	=	238000	717350
Raw material purchases			229000						=	229000
Raw materials used			-230500	195925		34575			=
Utility costs						92600			=	92600
Depreciation charges						78300		-104400	=		-26100
Advertising									=	143000	-143000
Salaries & wages	-274500			96000		75500			=		-103000
Prepaid insurance expired						5215	-7450		=		-2235
Miscellaneous marketing									=	13850	-13850
Applied overhead				290000		-290000			=
Transfer completed videos to finished goods				-578000	578000				=
Sales		954000							=		954000
Transfer finished goods to cost of goods sold					-623910				=		-623910
Cash collections from customers	904000	-904000							=
Payment to suppliers	-608000								=	-608000
Overapplied overhead						3810			=		3810
Ending balances @12/31	110700	156600	11900	51325	34490	0	900	505600	=	108450	763065

2.

Star Videos, Inc.
Schedule of Cost of Goods Manufactured
For the Year Ended December 31
Beginning raw materials inventory $	13400
Raw material purchases	229000
Raw materials available for use	242400
Ending raw materials inventory	-11900
Raw materials used	230500
Less: Indirect materials	-34575	195925
Direct labor		96000
Manufacturing overhead		290000
Total manufacturing costs		581925
Beginning videos in process inventory		47400
Total videos in process inventory		629325
Ending videos in process inventory		-51325
Cost of goods manufactured		578000

3.

Star Videos, Inc.
Schedule of Cost of Goods Sold
For the Year Ended December 31
Cost of goods manufactured	578000
Beginning finished goods inventory	80400
Cost of goods available for sale	658400
Ending finished goods inventory	-34490
Cost of goods sold	623910
Overapplied overhead	-3810
Adjusted cost of goods sold $	620100

4.

Star Videos, Inc.
Income Statement
For the Year Ended December 31
Sales revenue		954000
Cost of goods sold		620100
Gross profit		333900
Operating expense:
Depreciation expense	26100
Advertising expense	143000
Salaries & wages expense	103000
Insurance expense	2235
Miscellaneous marketing and adm. expense	13850
Total operating expense		288185
Net income		45715