Question

Problem 3-16 Comprehensive Problem [LO3-1, LO3-2, LO3-4]

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 $103,500 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	$	10,200
Work in process	$	4,400
Finished goods	$	8,600

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 167,000.
2. Raw materials used in production, $142,000 (materials costing $126,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	164,000
Indirect labor	$	302,300
Sales commissions	$	21,000
Administrative salaries	$	49,000

1. Rent for the year was $19,000 ($13,700 of this amount related to factory operations, and the remainder related to selling and administrative activities).
2. Utility costs incurred in the factory, $14,000.
3. Advertising costs incurred, $12,000.
4. Depreciation recorded on equipment, $20,000. ($18,000 of this amount related to equipment used in factory operations; the remaining $2,000 related to equipment used in selling and administrative activities.)
5. Record the manufacturing overhead cost 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 $518,000. 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 =			103500/45000
				230%
	Accounting titles & Explanations					debit	Credit
a)	Raw materials inventory					167,000
	cash						167,000
b)	work in process inventory					126,000
	Factory overhead					16,000
	Raw materials inventory						142,000
c)	Work in process inventory					164,000
	Factory overhead					302,300
	Sales commission expense					21,000
	Salaries expense					49,000
	cash						536,300
d)	Factory overhead					13,700
	Rent expense					5,300
	cash						19,000
e)	Factory overhead					14,000
	cash						14,000
f)	Advertising expense					12,000
	cash						12,000
g)	Factory overhead					18,000
	Depreciation expense					2,000
	Accumulated depreciation						20,000
h)	work in process inventory					377200
	Factory overhead						377200
i)	finished goods inventory					225,000
	work in process inventory						225,000
j)	Cash					518,000
	Sales revenue						518,000
	cost of goods sold					219,000
	finished goods inventory						219,000
	T-Accounts
	Raw materials				Work in process
Bal	10,200				Bal	4,400
a)	167,000	142,000	b)		b)	126,000	225,000	i)
					c)	164,000
Bal	35,200				h)	377200
					Bal	446,600
					Manufacturing overhead
	Finished goods				beg.bal	0
Bal	8,600				b)	16,000	377200	h)
i)	225,000	219,000			c)	302,300
					d)	13,700
Bal	14,600				e)	14,000
					g)	18,000
							13,200	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					13,200
	Cost of goods sold						13,200
4)		Income Statement
	Sales						518,000
	less : cost of goods sold						205,800
	Gross margin						312,200
	less:Selling & administrative expense
	Sales comission					21,000
	Administrative salaries					49,000
	Rent exepense					5,300
	Advertising expense					12,000
	Depreciation expense					2,000	89,300
	Net operating income						222,900