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 $95,000 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	$	10,500
Work in process	$	4,800
Finished goods	$	8,400

1. Raw materials purchased on account, $168,000.
2. Raw materials used in production, $143,000 (materials costing $128,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	151,000
Indirect labor	$	210,100
Sales commissions	$	26,000
Administrative salaries	$	47,000

1. Rent for the year was $18,300 ($13,100 of this amount related to factory operations, and the remainder related to selling and administrative activities).
2. Utility costs incurred in the factory, $17,000.
3. Advertising costs incurred, $14,000.
4. Depreciation recorded on equipment, $22,000. ($17,000 of this amount related to equipment used in factory operations; the remaining $5,000 related to equipment used in selling and administrative activities.)
5. Manufacturing overhead cost was applied to jobs, $ ? .
6. Goods that had cost $229,000 to manufacture according to their job cost sheets were completed.
7. Sales for the year (all paid in cash) totaled $519,000. The total cost to manufacture these goods according to their job cost sheets was $218,000.

QUESTIONS:

1. 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).

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

3. Is Manufacturing Overhead underapplied or overapplied for the year?

Answer 1

	predetermined overhead rate =			95000/50000
				1.9
No.	Accounting titles & Explanations					debit	Credit
a)	Raw materials inventory					168,000
	cash						168,000
b)	work in process inventory					128,000
	Factory overhead					15,000
	Raw materials inventory						143,000
c)	Work in process inventory					151,000
	Factory overhead					210,100
	Sales commission expense					26,000
	Salaries expense					47,000
	cash						434,100
d)	Factory overhead					13,100
	Rent expense					5,200
	cash						18,300
e)	Factory overhead					17,000
	cash						17,000
f)	Advertising expense					14,000
	cash						14,000
g)	Factory overhead					17,000
	Depreciation expense					5,000
	Accumulated depreciation						22,000
h)	work in process inventory					286900
	Factory overhead						286900
i)	finished goods inventory					229,000
	work in process inventory						229,000
j)	Cash					519,000
	Sales revenue						519,000
	cost of goods sold					218,000
	finished goods inventory						218,000
	T-Accounts
	Raw materials				Work in process
Bal	10,500				Bal	4,800
a)	168,000	143,000	b)		b)	128,000	229,000
					c)	151,000
Bal	35,500				h)	286900
					Bal	341,700
					Manufacturing overhead
	Finished goods				beg.bal	0
Bal	8,400				b)	15,000	286900
i)	229,000	218,000			c)	210,100
					d)	13,100
Bal	19,400				e)	17,000
					g)	17,000
							14,700
	cost of goods sold
Beg.bal	0
j)	218,000
3a)	Manufacturing overhead is over applied
3B)	Journal entry
	Account titles & Explanations					Debit	Credit
	Factory overhead					14,700
	Cost of goods sold						14,700
4)		Income Statement
	Sales						519,000
	less : cost of goods sold						203,300
	Gross margin						315,700
	less:Selling & administrative expense
	Sales comission					26,000
	Administrative salaries					47,000
	Rent exepense					5,200
	Advertising expense					14,000
	Depreciation expense					5,000	97,200
	Net operating income						218,500