Question

Pack Rite manufactures back packs for schools. The business uses a perpetual inventory system
and has a highly labour intensive production process, so it applies manufacturing overhead based
on direct labour hours. Any overhead variance is closed out to Cost of Goods Sold.
Pack Rite’s pre-determined overhead application rate for 2017 was computed from the following
data:
Total estimated factory overheads
Total estimated direct labour hours
$4,200,000
35,000
During the first month of 2017, the business recorded the following transactions.
i) Purchased materials on account, $500,000
ii) Incurred manufacturing wages of $1,065,000
iii) Issued direct materials and used direct labour in manufacturing
Direct Materials Direct Labour Direct Labour Hours
Job 401 $100,000 $220,000 1,200
Job 402 81,000 190,000 1,000
Job 403 90,000 205,000 1,100
Job 404 150,000 290,250 1,800
iv) Issued indirect materials to production, $80,000
v) Charged indirect manufacturing wages to production, $159,750
vi) Depreciation expense on factory equipment used on the different jobs, $300,000
vii) Other overhead costs incurred on jobs 401 to 404 amounted to $112,750
viii) Applied factory overhead to the various jobs using the pre-determined factory overhead rate.
ix) Finished Jobs 401 – 403 and transferred to the finished goods inventory account
x) Shipped Job 401 and 402 and billed customers at a margin of 25% on cost.
Required:
a) Compute Pack Rite’s predetermined manufacturing overhead rate.
b) Calculate the total manufacturing cost for each job.
c) Using the total figures, record the transactions in the general journal.
d) Post the manufacturing overhead transactions to the Manufacturing Overhead T-account and
state the balance on the account before closing the account. Show the journal entries necessary
to dispose of this variance.
e) What is the balance in the Cost of Goods Sold account after the adjustment?
f) Calculate the gross profit earned by Pack Rite for the month.
g) Open T-accounts for Work in Process Inventory and Finished Goods Inventory. Post the
appropriate entries to these accounts & determine the ending account balances. Assume that
the beginning balances were zero.

Answer 1

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Part -a
Total Overhead	A	$       4,200,000
Total Direct Labor Hours	B	35,000
Plant-wise Overhead Rate	A/B	$                  120
Part -b
		Job 401	Job 402	Job 403	Job 404	Total
Direct Material		$          100,000	$           81,000	$     90,000	$150,000	$   421,000
Direct Labor		$          220,000	$         190,000	$   205,000	$290,250	$   905,250
Overheads:
-Job 401	1200*120	$          144,000				$   144,000
-Job 402	1000*120		$         120,000			$   120,000
-Job 403	1100*120			$   132,000		$   132,000
-Job 404	1800*120				$216,000	$   216,000
Total Manufacturing Cost		$          464,000	$         391,000	$   427,000	$656,250	$1,938,250
Part -c
i	Raw Material Inventory	$          500,000
	Accounts Payable		$         500,000
ii	Manufacturing Wages	$       1,065,000
	Wages Payable		$      1,065,000
iii	Work in process Inventory	$          421,000
	Raw Material Inventory		$         421,000	From Part -b
iii	Work in process Inventory	$          905,250
	Manfacturing wages		$         905,250	From Part -b
iv	Factory Overhead	$            80,000
	Raw Material Inventory		$           80,000
v	Factory Overhead	$          159,750
	Manfacturing wages		$         159,750
vi	Factory Overhead	$          300,000
	Accumulated Depreciation		$         300,000
vii	Factory Overhead	$          112,750
	Other Accounts		$         112,750
viii	Work in process Inventory	$          612,000		From Part -b
	Factory Overhead		$         612,000
ix	Finished Goods Inventory	$       1,282,000		From Part -b
	Work in process Inventory		$      1,282,000	464000+391000+427000
x	Cost of Goods Sold	$          855,000		From Part -b
	Finished Goods Inventory		$         855,000	464000+391000
x	Cash	$       1,068,750		855000+25%
	Sales		$      1,068,750
Part d
	Manufacturing Overhead Account
	Debit		Credit
	iv	$            80,000	viii	$   612,000
	v	$          159,750	COGS	$     40,500
	vi	$          300,000
	vii	$          112,750
Journal:	Cost of Goods Sold	$            40,500		Working Below
	Factory Overhead		$           40,500
	(to dispose off balance)
Part e:	Cost of Goods Sold
	Debit		Credit
	x	$          855,000
	Manufacturing Overheads	$            40,500
Balance		$          895,500
Part f	Gross Proft
	Sale	$       1,068,750
	Less: Cost of Goods Sold	$          895,500
	Gross Profit	$          173,250
Part g	Inventory
	Work in Process Inventory
	Debit		Credit
	iii	$          421,000	ix	$1,282,000
	iii	$          905,250
	viii	$          612,000
	Balance	$          656,250
	Finished Goods Inventory
	Debit		Credit
	ix	$       1,282,000	x	$   855,000
	Balance	$          427,000