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 $105,000 of manufacturing overhead for an estimated activity level of $50,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,700
Work in process	$	4,700
Finished goods	$	8,200

During the year, the following transactions were completed:

Raw materials purchased for cash, $ 166,000.

Raw materials used in production, $143,000 (materials costing $126,000 were charged directly to jobs; the remaining materials were indirect).

Cash paid to employees as follows:

Direct labor	$	161,000
Indirect labor	$	264,400
Sales commissions	$	25,000
Administrative salaries	$	42,000

Cash paid for rent during the year was $18,600 ($13,300 of this amount related to factory operations, and the remainder related to selling and administrative activities).

Cash paid for utility costs in the factory, $11,000.

Cash paid for advertising, $11,000.

Depreciation recorded on equipment, $20,000. ($18,000 of this amount related to equipment used in factory operations; the remaining $2,000 related to equipment used in selling and administrative activities.)

Manufacturing overhead cost was applied to jobs, $ ? .

Goods that had cost $229,000 to manufacture according to their job cost sheets were completed.

Sales for the year (all paid in cash) totaled $505,000. The total cost to manufacture these goods according to their job cost sheets was $215,000.

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.

Answer 1

1.

1		Debit	Credit
a	Raw Materials	$ 166,000.00
	Cash		$ 166,000.00
	(To Record Raw materials purchased for cash)
b	Work in Process	$ 126,000.00
	Manufacturing Overhead	$    17,000.00
	Raw Materials		$ 143,000.00
	(To Record Raw materials used in production)
c	Work in Process	$ 161,000.00
	Manufacturing Overhead	$ 264,400.00
	Sales Commissions Expense	$    25,000.00
	Salaries Expense	$    42,000.00
	Cash		$ 492,400.00
	(To Record Cash Paid to Employess)
d	Manufacturing Overhead	$    13,300.00
	Rent Expense	$      5,300.00
	Cash		$    18,600.00
	(To Record Cash paid for rent )
e	Manufacturing Overhead	$    11,000.00
	Cash		$    11,000.00
	(To Record Cash paid for utility costs in the factory)
f	Advertising Expense	$    11,000.00
	Cash		$    11,000.00
	(To Record Cash paid for advertising)
g	Manufacturing Overhead	$    18,000.00
	Depreciation Expense	$      2,000.00
	Accumulated Depreciation		$    20,000.00
	(To Record Depreciation recorded on equipment)
h	Work in Process	$338,100
	Manufacturing Overhead		$338,100
predetermined Overhead Rate	Estimated total manufacturing overhead cost/Estimated total Amount of the Allocation base
	105000/50000=210%
	161000 *210%= $338,100		$338,100
i	Finished Goods	$ 229,000.00
	Work In process		$ 229,000.00
	(To transfer it to Finished goods)
j	Cash	$ 505,000.00
	Sales		$ 505,000.00
	(To Record Sales)
h	Cost of Goods Sold	$ 215,000.00
	Finished Goods		$ 215,000.00

2)

Raw Materials A/c
Debit			Credit
	Amount		Amount
Opening Balance	$              10,700.00	Work in Process	$ 126,000.00
Cash	$            166,000.00	Manufacturing Overhead	$    17,000.00
		Closing Balance	$    33,700.00
Total	$            176,700.00	Total	$ 176,700.00
Work In Process A/c
Debit			Credit
	Amount		Amount
Opening Balance	$                 4,700.00	Finished Goods	$ 229,000.00
Raw materials	$            126,000.00
Cash	$            161,000.00	Closing Balance	$ 400,800.00
Manufacturing Overhead	$338,100
Total	$            629,800.00	Total	$ 629,800.00
Finished Goods A/c
Debit			Credit
	Amount		Amount
Opening Balance	$                 8,200.00	Cost of Goods Sold	$ 215,000.00
Work in Process	$            229,000.00	Closing Balance	$    22,200.00
Total	$            237,200.00	Total	$ 237,200.00
Manufacturing Overhead A/c
Debit			Credit
	Amount		Amount
Raw materials	$              17,000.00	Work in Process	$338,100
Cash	$            264,400.00
Cash	$              13,300.00
Cash	$              11,000.00
Accumulated Depreciation	$              18,000.00
Closing Balance	$              14,400.00
Total	$            338,100.00	Total	$ 338,100.00
Cost of Goods Sold A/c
Debit			Credit
	Amount		Amount
Finished Goods	$            215,000.00	Closing Balance	$ 215,000.00
Total	$            215,000.00	Total	$ 215,000.00

3a)Manufacturing Overhead is Overapplied by $ 14,400 for the year.

Journal Entry to Close

Manufacturing Overhead $14,400

Cost of Goods Sold $14,400

Gold Nest Company
Income Statement
Sales		$ 505,000.00
Less-Cost of Goods Sold		$ 200,600.00
(215,000-14,400
Gross Margin		$ 304,400.00
Less: Selling and Administrative expenses
Sales commissions	$    25,000.00
Administrative Salaries	$    42,000.00
Rent Expenses	$      5,300.00
Advertising Expense	$    11,000.00
Depreciation Expense	$    18,000.00	$ 101,300.00
Net Income		$ 203,100.00