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 $342,000 of manufacturing overhead for an estimated allocation base of 950 direct labor-hours. The following transactions took place during the year:

Raw materials purchased on account, $210,000.

Raw materials used in production (all direct materials), $195,000.

Utility bills incurred on account, $61,000 (95% related to factory operations, and the remainder related to selling and administrative activities).

Accrued salary and wage costs:

Direct labor (1,025 hours)	$	240,000
Indirect labor	$	92,000
Selling and administrative salaries	$	120,000

Maintenance costs incurred on account in the factory, $56,000

Advertising costs incurred on account, $138,000.

Depreciation was recorded for the year, $86,000 (75% related to factory equipment, and the remainder related to selling and administrative equipment).

Rental cost incurred on account, $111,000 (80% 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, $790,000.

Sales for the year (all on account) totaled $1,300,000. These goods cost $820,000 according to their job cost sheets.

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

Raw Materials	$	32,000
Work in Process	$	23,000
Finished Goods	$	62,000

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. Prepare journal entries to record the preceding transactions.

No:	General Journal	Debit	Credit
a	Raw Materials	$210,000
	Accounts Payable		$210,000
b	Work in progress	$195,000
	Raw materials		$195,000
c	Manufacturing Overhead	$57,950
	Utilities Expense	$3,050
	Accounts Payable		$61,000
d	Work in Process	$240,000
	Manufacturing Overhead	$92,000
	Salaries Expense	$120,000
	Salaries and Wages Payable		$452,000
e	Manufacturing Overhead	$56,000
	Accounts Payable		$56,000
f	Advertising Expense	$138,000
	Accounts Payable		$138,000
g	Manufacturing Overhead	$64,500
	Depreciation Expense	$21,500
	Accumulated Depreciation		$86,000
h	Manufacturing Overhead	$88,800
	Rent Expense	$22,200
	Accounts Payable		$111,000
i	Work in Process	$369,000
	Manufacturing Overhead (Working Note 1)		$369,000
j	Finished Goods	$790,000
	Work in Process		$790,000
K(a)	Accounts Receivable	$1,300,000
	Sales		$1,300,000
K(b)	Cost of Goods Sold	$820,000
	Finished Goods		$820,000

Working Note: 1

Predetermined Overhead Rate = Estimated total manufacturing overhead cost

                                                                Estimated total amount of the allocation base

                                                                = $342,000 / 950 DLHs

                                                                = $360 per DLH (Direct labor Hour)

1,025 actual DLH * $360 per DLH = $369,000

2. Post your entries to T-accounts. (Don’t forget to enter the beginning inventory balances above.)

Accounts Receivable						Sales
(k a)	1,300,000									(k)		1,300,000
Raw Materials						Cost of Goods Sold
Bal.	32,000			195,000		(k b)	820,000
(a)	210,000		(b)
Bal.	47,000
Work in Process						Manufacturing Overhead
Bal.	23,000		(j)	790,000		(c)	57,950				(i)	369,000
(b)	195,000					(d)	92,000
(d)	240,000					(e)	56,000
(i)	369,000					(g)	64,500
Bal.	37,000					(h)	88,800
											Bal.	9,750
Finished Goods						Advertising Expense
Bal.	62,000		(k)	820,000		(f)	138,000
(j)	790,000
Bal.	32,000
Accumulated Depreciation						Utilities Expense
			(g)	86,000		(c)	3,050
Accounts Payable						Salaries Expense
			(a)	210,000		(d)	120,000
			(c)	61,000
			(e)	56,000		Depreciation Expense
			(f)	138,000		(g)	21,500
			(h)	111,000
Salaries & Wages Payable						Rent Expense
			(d)	452,000		(h)	22,200

3. Prepare a schedule of cost of goods manufactured.

		Froya Fabrikker A/S Schedule of Cost of Goods Manufactured
		Direct materials:
		Raw materials inventory, beginning............................	$ 32,000
		Purchases of raw materials...........................................	$ 210,000
		Materials available for use...........................................	$ 242,000
		Raw materials inventory, ending.................................	$ 47,000
		Materials used in production.......................................		$195,000
		Direct labor......................................................................		$ 240,000
		Manufacturing overhead applied to work in process......		$ 369,000
		Total manufacturing costs...............................................		$ 804,000
		Add: Work in process, beginning....................................		$ 23,000
				$ 827,000
		Deduct: Work in process, ending....................................		$  37,000
		Cost of goods manufactured...........................................		$790,000

4A. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

No:	General Journal	Debit	Credit
	Manufacturing Overhead	$9,750
	Cost of goods sold		$9,750

4B. Prepare a schedule of cost of goods sold.

	Schedule of cost of goods sold:
	Finished goods inventory, beginning...........................		$  62,000
	Add: Cost of goods manufactured..............................		$ 790,000
	Goods available for sale...............................................		852,000
	Deduct finished goods inventory, ending...................		32,000
	Unadjusted cost of goods sold....................................		820,000
	Deduct: Overapplied overhead....................................		9,750
	Adjusted cost of goods sold........................................		$810,250

5. Prepare an income statement for the year.

5.	Froya Fabrikker A/S Income Statement
	Sales............................................................................		$1,300,000
	Cost of goods sold......................................................		$ 810,250
	Gross margin...............................................................		$ 489,750
	Selling and administrative expenses:
	Advertising expense................................................	$138,000
	Utilities expense......................................................	$ 3,050
	Salaries expense.......................................................	$ 120,000
	Depreciation expense...............................................	$ 21,500
	Rent expense...........................................................	$ 22,200	$ 304,750
	Net operating income..................................................		$   185,000

Feel free to ask your doubts . Thanks!!!