Question

P1. Coyote Company manufactures and sells 2 products: EL and GL. Coyote uses a job-order costing system in which overhead is applied to jobs on the basis of machine hours. Its predetermined overhead rate is based on a cost formula that estimated $300,000 of manufacturing overhead for an estimated activity level of 25,000 machine hours. The inventory balances at the beginning and at the end were as follows:

                                    At the beginning         At the end

Raw materials             $40,000                       $?

Work in process-EL    $10,000                       $18,000

Work in process-GL   $15,000                       $25,000

Finished goods            $70,000                       $84,000

Actual machine hours for the productions of EL and GL were

            EL       14,000 machine hours

            GL       12,000 machine hours

During the year, the following transactions were completed:

1. Raw materials purchased for cash, $360,000.
2. Raw materials used in production, $380,000 (materials costing $200,000 were charged directly to WIP-EL and $140,000 to WIP-GL; the remaining materials were indirect).
3. Cash paid to employees as follows:
   1. Direct labor for EL                 $100,000
   2. Direct labor for GL                 $150,000
   3. Indirect labor                          $190,000
   4. Sales commissions                  $60,000
   5. Administrative salaries           $80,000

4. Cash paid for rent during the year was $30,000 ($20,000 of this amount related to factory operations, and the remainder related to selling and administrative activities).
5. Depreciations on property, plant, and equipment was $40,000 (($30,000 of this amount related to factory operations, and the remainder related to selling and administrative activities).
6. Cash paid for other manufacturing overhead as follows:
   1. Utility              $20,000
   2. Insurance        $10,000
7. Sales revenues earned were $1,800,000

Instructions:

1. Prepare all necessary journal entries for the above transactions.
2. If manufacturing overhead costs were overapplied or underapplied, prepare a journal entry to close it to costs of goods sold.
3. Compute COGM of EL and COGM of GL for the year.
4. Prepare gross profit section of income statement for the year.

Answer 1

Overhead rate = $300000 / 25000 = $12 per hour
Overhead applied = 26000 x $12 = $312000
Actual Overhead = $40000+190000+20000+30000+30000 = $310000
Over-applied Overhead = $312000-310000 = $2000

Account Titles	Debit	Credit
Raw Material Inventory	$         360,000
Cash		$         360,000
Work in Process - EL	$         200,000
Work in Process - GL	$         140,000
Manufacturing Overhead	$           40,000
Raw Material Inventory		$         380,000
Work in Process - EL	$         100,000
Work in Process - GL	$         150,000
Manufacturing Overhead	$         190,000
Sales Commission Expense	$           60,000
Salaries Expense	$           80,000
Cash		$         580,000
Manufacturing Overhead	$           20,000
Rent Expense	$           10,000
Cash		$           30,000
Manufacturing Overhead	$           30,000
Depreciation Expense	$           10,000
Accumulated Depreciation		$           40,000
Manufacturing Overhead	$           30,000
Cash		$           30,000
Accounts Receivable / Cash	$      1,800,000
Sales Revenue		$      1,800,000
Work in Process - EL	$         168,000
Work in Process - GL	$         144,000
Manufacturing Overhead		$         312,000
(Overhead applied)
Manufacturing Overhead	$             2,000
Cost of Goods sold		$             2,000
(Closing of overapplied overhead)

Schedule of Cost of Goods manufactured - EL
Direct Materials	$         200,000
Direct Labor	$         100,000
Manufacturing Overhead Applied	$         168,000
Total Manufacturing Costs incurred	$         468,000
Add : Beginning Work in Process Inventory	$           10,000
Total Manufacturing Costs	$         478,000
Deduct: Ending Work in Process Inventory	$           18,000
Cost of Goods Manufactured	$         460,000
Schedule of Cost of Goods manufactured - GL
Direct Materials	$         140,000
Direct Labor	$         150,000
Manufacturing Overhead Applied	$         144,000
Total Manufacturing Costs incurred	$         434,000
Add : Beginning Work in Process Inventory	$           15,000
Total Manufacturing Costs	$         449,000
Deduct: Ending Work in Process Inventory	$           25,000
Cost of Goods Manufactured	$         424,000

Income Statement
Sales Revenue	$      1,800,000
Cost of Goods Sold	$         868,000
Gross Profit	$         932,000

Schedule of Cost of Goods Sold
Finished Goods Inventory, Beginning	$           70,000
Add: Cost of Goods Manufactured	$         884,000
Cost of Goods Available for sale	$         954,000
Deduct : Finished Goods Inventory, Ending	$           84,000
Unadjusted Cost of goods sold	$         870,000
Overapplied Overhead	$            (2,000)
Adjusted Cost of goods sold	$         868,000