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 $85,000 of manufacturing overhead for an estimated activity level of $50,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows: Raw materials $ 10,400 Work in process $ 4,200 Finished goods $ 8,500 During the year, the following transactions were completed: Raw materials purchased on account, $ 163,000. Raw materials used in production, $143,000 (materials costing $129,000 were charged directly to jobs; the remaining materials were indirect). Costs for employee services were incurred as follows: Direct labor $ 162,000 Indirect labor $ 198,900 Sales commissions $ 21,000 Administrative salaries $ 41,000 Rent for the year was $18,200 ($13,600 of this amount related to factory operations, and the remainder related to selling and administrative activities). Utility costs incurred in the factory, $19,000. Advertising costs incurred, $15,000. Depreciation recorded on equipment, $25,000. ($15,000 of this amount related to equipment used in factory operations; the remaining $10,000 related to equipment used in selling and administrative activities.) Record the manufacturing overhead cost applied to jobs. Goods that had cost $227,000 to manufacture according to their job cost sheets were completed. Sales for the year (all paid in cash) totaled $502,000. The total cost to manufacture these goods according to their job cost sheets was $217,000. 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

1) Predetermined overhead rate= Estimated total manufacturing overhead/Estimated direct labor

= $85000/50000= 170% of direct labor

No	Transaction	General Journal	Debit	Credit
1.	a.	Raw materials	$163000
		Accounts payable		$163000
		(To record raw materials purchased on account)
2.	b.	Work in process	$129000
		Manufacturing overhead (143000-129000)	$14000
		Raw materials		$143000
		(To record raw materials used in production)
3.	c.	Work in process	$162000
		Manufacturing overhead	$198900
		Sales commissions expense	$21000
		Administrative salaries	$41000
		Cash		$422900
		(To record cost for employee services incurred)
4.	d.	Manufacturing overhead	$13600
		Rent expense (18200-13600)	$4600
		Cash		$18200
		(To record rent)
5.	e.	Manufacturing overhead	$19000
		Cash		$19000
		(To record utility costs incurred)
6.	f.	Advertising expense	$15000
		Cash		$15000
		(To record advertising expense incurred)
7.	g.	Manufacturing overhead	$15000
		Depreciation expense (25000-15000)	$10000
		Accumulated depreciation		$25000
		(To record depreciation expense)
8.	h.	Work in process ($162000*170%)	$275400
		Manufacturing overhead		$275400
		(To record manufacturing overhead applied)
9.	i.	Finished goods	$227000
		Work in process		$227000
		(To record jobs transferred to finished goods)
10.	j.	Cash	$502000
		Sales		$502000
		(To record sales)
		Cost of goods sold	$217000	$217000
		Finished goods
		(To record cost of goods sold)

2)

Raw materials					Work in process
Bal.	$10400	(b)	143000		Bal.	$4200	(i)	227000
(a)	163000				(b)	129000
					(c)	162000
Bal.	$30400				(h)	275400
Finished goods					Bal.	343600
Bal.	$8500	(j)	217000
i.	227000				Manufacturing overhead
					(b)	14000	(h)	275400
Bal.	$18500				(c)	198900
					(d)	13600
Cost of goods sold					(e)	19000
(j)	217000				(g)	15000
					Bal.		14900

3-A) Manufacturing overhead applied= $14000+198900+13600+19000+15000= $260500

Under or overapplied overhead= Manufacturing overhead applied-Actual manufacturing overhead

= $260500-275400= $14900 overapplied

b)

No.	Transaction	General Journal	Debit	Credit
1.	a.	Manufacturing overhead	$14900
		Cost of goods sold		$14900
		(To record overapplied overhead adjusted to cost of goods sold)

4)

Gold Nest Company
Income Statement
Sales revenue		$502000
Less: Cost of goods sold (217000-14900)		-202100
Gross profit		299900
Less: Selling and administrative expenses
Sales commissions expense	21000
Administrative salaries	41000
Rent expense	4600
Advertising expense	15000
Depreciation expense	10000
Total selling and administrative expenses		-91600
Net operating income		$208300