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	$	10,300
Work in process	$	4,000
Finished goods	$	8,800

During the year, the following transactions were completed:

1. Raw materials purchased on account, $162,000.
2. Raw materials used in production, $141,000 (materials costing $130,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	156,000
Indirect labor	$	199,500
Sales commissions	$	23,000
Administrative salaries	$	46,000

1. Rent for the year was $18,500 ($13,300 of this amount related to factory operations, and the remainder related to selling and administrative activities).
2. Utility costs incurred in the factory, $11,000.
3. Advertising costs incurred, $13,000.
4. Depreciation recorded on equipment, $21,000. ($17,000 of this amount related to equipment used in factory operations; the remaining $4,000 related to equipment used in selling and administrative activities.)
5. Manufacturing overhead cost was applied to jobs, $ ? .
6. Goods that had cost $225,000 to manufacture according to their job cost sheets were completed.
7. Sales for the year (all paid in cash) totaled $508,000. The total cost to manufacture these goods according to their job cost sheets was $219,000.

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

	predetermined overhead rate =			76500/45000
				170%
	Accounting titles & Explanations					debit	Credit
a)	Raw materials inventory					162,000
	cash						162,000
b)	work in process inventory					130,000
	Factory overhead					11,000
	Raw materials inventory						141,000
c)	Work in process inventory					156,000
	Factory overhead					199,500
	Sales commission expense					23,000
	Salaries expense					46,000
	cash						424,500
d)	Factory overhead					13,300
	Rent expense					5,200
	cash						18,500
e)	Factory overhead					11,000
	cash						11,000
f)	Advertising expense					13,000
	cash						13,000
g)	Factory overhead					17,000
	Depreciation expense					4,000
	Accumulated depreciation						21,000
h)	work in process inventory					265200
	Factory overhead		(156,000*170%)				265200
i)	finished goods inventory					225,000
	work in process inventory						225,000
j)	Cash					508,000
	Sales revenue						508,000
	cost of goods sold					219,000
	finished goods inventory						219,000
	T-Accounts
	Raw materials				Work in process
Bal	10,300				Bal	4,000
a)	162,000	141,000	b)		b)	130,000	225,000	i)
					c)	156,000
Bal	31,300				h)	265200
					Bal	330,200
					Manufacturing overhead
	Finished goods				beg.bal	0
Bal	8,800				b)	11,000	265200	h)
i)	225,000	219,000			c)	199,500
					d)	13,300
Bal	14,800				e)	11,000
					g)	17,000
							13,400	Bal
	cost of goods sold
Beg.bal	0
j)	219,000
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						508,000
	less : cost of goods sold			(219000-13400)			205,600
	Gross margin						302,400
	less:Selling & administrative expense
	Sales comission					23,000
	Administrative salaries					46,000
	Rent exepense					5,200
	Advertising expense					13,000
	Depreciation expense					4,000	91,200
	Net operating income						211,200