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 $374,000 of manufacturing overhead for an estimated allocation base of 1,100 direct labor-hours. The following transactions took place during the year:

1. Raw materials purchased on account, $235,000.
2. Raw materials used in production (all direct materials), $220,000.
3. Utility bills incurred on account, $66,000 (90% related to factory operations, and the remainder related to selling and administrative activities).
4. Accrued salary and wage costs:

Direct labor (1,175 hours)	$	265,000
Indirect labor	$	97,000
Selling and administrative salaries	$	145,000

1. Maintenance costs incurred on account in the factory, $61,000
2. Advertising costs incurred on account, $143,000.
3. Depreciation was recorded for the year, $91,000 (80% related to factory equipment, and the remainder related to selling and administrative equipment).
4. Rental cost incurred on account, $116,000 (85% related to factory facilities, and the remainder related to selling and administrative facilities).
5. Manufacturing overhead cost was applied to jobs, $ ? .
6. Cost of goods manufactured for the year, $840,000.
7. Sales for the year (all on account) totaled $1,550,000. These goods cost $870,000 according to their job cost sheets.

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

Raw Materials	$	37,000
Work in Process	$	28,000
Finished Goods	$	67,000

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)	Journal Entries
	Events	Particulars			Debit	Credit
	a)	Raw Materials			$     235,000.00
		To Accounts Payable				$     235,000.00
	b)	WIP			$     220,000.00
		To Raw Materials				$     220,000.00
	c)	Manu. OH			$       59,400.00
		Utilities Expense			$         6,600.00
		To Utilities Payable				$       66,000.00
	d)	WIP			$     265,000.00
		Manu. OH			$       97,000.00
		Salaries Expense			$     145,000.00
		To Salaries Payable				$     507,000.00
	e)	Manu. OH			$       61,000.00
		To Accounts Payable				$       61,000.00
	f)	Advertising Expense			$     143,000.00
		To Accounts Payable				$     143,000.00
	g)	Manu. OH			$       72,800.00
		Depreciation Expense			$       18,200.00
		To Accumulated Depreciation				$       91,000.00
	h)	Manu. OH			$       98,600.00
		Rent Expense			$       17,400.00
		To Rent Payable				$     116,000.00
	i)	WIP			$     399,500.00
		To Manu. OH				$     399,500.00
		($ 374000 x 1175/1100)
	j)	Finished Goods			$     840,000.00
		To WIP				$     840,000.00
	k)	Accounts Receivable			$ 1,550,000.00
		To Sales				$ 1,550,000.00
		Cost of Goods sold			$     870,000.00
		To Finished Goods				$     870,000.00

2)
	Raw Materials					Work in Process					Manu. OH					Finished Goods
	Beg. Bal	$   37,000.00	b)	$ 220,000.00		Beg. Bal	$   28,000.00	j)	$ 840,000.00		c)	$   59,400.00	i)	$ 399,500.00		Beg. Bal	$   67,000.00	k)	$ 870,000.00
	a)	$ 235,000.00	End. Bal	$   52,000.00		b)	$ 220,000.00				d)	$   97,000.00				j)	$ 840,000.00	End. Bal	$   37,000.00
						d)	$ 265,000.00				e)	$   61,000.00
						i)	$ 399,500.00	End. Bal	$   72,500.00		g)	$   72,800.00
											h)	$   98,600.00

3)
	Schedule of Cost of Goods Manufactured
	Direct Materials			$     220,000.00
	Direct Labor			$     265,000.00
	Manu. OH applied			$     399,500.00
	Total Manu. Cost			$     884,500.00
Add:	Beginning WIP			$       28,000.00
				$     912,500.00
Less:	Ending WIP			$       72,500.00
	Cost of Goods Manufactured			$     840,000.00

4.a)	Manu. OH			$       10,700.00
	To Cost of Goods sold				$       10,700.00

4.b)	Schedule of Cost of Goods sold
	Beginning Finished Goods			$       67,000.00
Add:	Cost of Goods Manufactured			$     840,000.00
	Cost of Goods Available for Sale			$     907,000.00
Less:	Ending Finished Goods			$       37,000.00
	Unadjusted Cost of Goods sold			$     870,000.00
Less:	Overapplid OH			$       10,700.00
	Adjusted Cost of Goods sold			$     859,300.00

5)	Income Statement
	Sales			$ 1,550,000.00
Less:	Adjusted Cost of Goods sold			$     859,300.00
	Gross Margin			$     690,700.00
Less:	Operating Expenses
	Utilities Expense			$         6,600.00
	Salaries Expense			$     145,000.00
	Advertising Expense			$     143,000.00
	Rent Expense			$       17,400.00
	Depreciation Expense			$       18,200.00
	Total Expense			$     330,200.00
	Net Income			$     360,500.00