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 $76,500 of manufacturing overhead for an estimated activity level of $45,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,900
Work in process	$	4,800
Finished goods	$	8,500

During the year, the following transactions were completed:

Raw materials purchased for cash, $ 167,000.

Raw materials used in production, $144,000 (materials costing $121,000 were charged directly to jobs; the remaining materials were indirect).

Cash paid to employees as follows:

Direct labor	$	158,000
Indirect labor	$	184,800
Sales commissions	$	22,000
Administrative salaries	$	48,000

Cash paid for rent during the year was $18,600 ($13,400 of this amount related to factory operations, and the remainder related to selling and administrative activities).

Cash paid for utility costs in the factory, $19,000.

Cash paid for advertising, $15,000.

Depreciation recorded on equipment, $22,000. ($15,000 of this amount related to equipment used in factory operations; the remaining $7,000 related to equipment used in selling and administrative activities.)

Manufacturing overhead cost was applied to jobs, $ ? .

Goods that had cost $227,000 to manufacture according to their job cost sheets were completed.

Sales for the year (all paid in cash) totaled $501,000. 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. 10,900 Beg. Bal. 4,800 a. 167,000 144,000 b. b. 121,000 c. 158,000 j. End. Bal. 33,900 End. Bal. 283,800 Finished Goods Manufacturing Overhead Beg. Bal. Beg. Bal. End. Bal. Cost of Goods Sold End. Bal. Beg. Bal. End. Bal.

Answer 1

	predetermined overhead rate =			76500/45,000
				1.7
No.	Accounting titles & Explanations					debit	Credit
a)	Raw materials inventory					167,000
	cash						167,000
b)	work in process inventory					121,000
	Factory overhead					23,000
	Raw materials inventory						144,000
c)	Work in process inventory					158,000
	Factory overhead					184,800
	Sales commission expense					22,000
	Salaries expense					48,000
	cash						412,800
d)	Factory overhead					13,400
	Rent expense					5,200
	cash						18,600
e)	Factory overhead					19,000
	cash						19,000
f)	Advertising expense					15,000
	cash						15,000
g)	Factory overhead					15,000
	Depreciation expense					7,000
	Accumulated depreciation						22,000
h)	work in process inventory					268600
	Factory overhead		(158000*170%)				268600
i)	finished goods inventory					227,000
	work in process inventory						227,000
j)	Cash					501,000
	Sales revenue						501,000
	cost of goods sold					220,000
	finished goods inventory						220,000
	T-Accounts
	Raw materials				Work in process
Bal	10,900	144,000	b)		Bal	4,800	227,000	i)
a)	167,000				b)	121,000
					c)	158,000
Bal	33,900				h)	268600
					Bal	325,400
	Finished goods				Manufacturing overhead
Bal	8,500	220,000	j)		b)	23,000	268600	h)
i)	227,000				c)	184,800
					d)	13,400
Bal	15,500				e)	19,000
					g)	15,000
							13,400	Bal
	cost of goods sold
j)	220,000
3a)	Manufacturing overhead is over applied
3B)	Journal entry
	Account titles & Explanations					Debit	Credit
	Factory overhead					13,400
	Cost of goods sold						13,400
4)		Income Statement
	Sales						501,000
	less : cost of goods sold			(220,000-13,400)			206,600
	Gross margin						294,400
	less:Selling & administrative expense
	Sales comission					22,000
	Administrative salaries					48,000
	Rent exepense					5,200
	Advertising expense					15,000
	Depreciation expense					7,000	97,200
	Net operating income						197,200