Question

Mr. Snell, a master cabinetmaker, owns and operates a custom-made cabinetry shop.  He uses a normal costing system and applies overhead on the basis of direct labor cost.  At the beginning of September, he had no outstanding debt and the following balances were in the general ledger:

         Cash                              $ 17,750

         Raw Materials Inventory         $  2,250

         Supplies Inventory                 $      750   Stockholders’ Equity         

         Work in Process Inventory     $    ????          Common Stock                  ???

         Finished Goods Inventory     $         0         Retained Earnings          $1,000

The subsidiary ledgers for work in process are as follows:

         Job             Materials     Labor                   Overhead

         A-3             $  750                   $1,100                  $  660

         A-4                 900                       650                     390

         A-5                325                       700                     420

Other items of importance are:

1. Two additional jobs were started:  A6, A7.
2. $2,725 of raw materials were purchased on account during the month
3. Raw materials listed were used; A-3 $280, A-4 $350. A-5 $520, A-6 $375, A-7 $250.
4. Supplies of $750 were purchased for cash, while $500 were used.
5. Direct labor was A-3 $750, A-4 $1,300. A-5 $550, A-6 $490, A-7 $370.
6. Indirect labor was $2,000.
7. Overhead is applied to production; overhead is applied as 60% of direct labor cost.
8. General administrative expenses for the month, $3,525 were paid in cash.
9. Jobs A-3, A-5, and A-7 were finished.  
10. A-3 was sold for $6,125 for cash and A-7 was sold for $1,750 on accounr.

REQUIRED:

1. Prepare the balance sheet for August 31.
2. Prepare job cost sheets for all jobs A-3, A-4, A-5, A-6, A-7.
3. Prepare all of the journal entries and T-charts for September.
4. Prepare cost of goods manufactured statement for September.
5. Prepare the cost of goods sold statement for September.
6. Close the over-under applied overhead to the cost of goods sold for September.
7. Prepare the income statement for September.
8. Prepare a statement of retained earnings.
9. Prepare a balance sheet for September 30.
10. Without regard to the line 6 above, assume that the over or under applied overhead is MATERIAL.  Prorate the balance to the appropriate accounts.

CONSIDER THE FOLLOWING SITUATION:

Mrs. Smith had stopped by one day and asked for a price on some cabinets.  Snell studied the plan and figured cost would be:

         Lumber                $   600

         Finishing materials              75

         Labor                                 640

         Overhead                  384

         Total                    $1,699

            With markup of 15%, the price would be $1,954.

Mrs. Smith was incensed stating that a competitor down the street, Mr. Haness, quoted a price of $1,600.  It is true that Snell does not want to lay off workers during slow times.  What recommendation would you make?  Why?  AN EXECUTIVE SUMMARY IS REQUIRED FOR THIS PROBLEM.

Answer 1

1.

Balance Sheet August 31
Assets	$	Liabilities and Stockholders' Equity	$
Cash	17,750	Common Stock	25,645
Raw Materials Inventory	2,250	Retained Earnings	1,000
Supplies Inventory	750
Work in Process Inventory	5,895
Total Assets	26,645	Total Liabilities and Stockholders Equity	26,645

2.

Job Cost Sheets
	A-3	A-4	A-5	A-6	A-7	Totals
Beginning Work in Process	$ 2,510	$ 1,940	$ 1,445	-	-	5,895
Costs incurred during September
Direct Materials	280	350	520	375	250	1,775
Direct Labor	750	1,300	550	490	370	3,460
Overhead	450	780	330	294	222	2,076
Total Manufacturing Costs	1,480	2,430	1,400	1,159	842	7,311
Total Cost of Work in Process	3,990	4,370	2,845	1,159	842	13,206
Cost of Goods Manufactured	(3,990)		(2,845)		(842)	(7,677)
Ending Work in Process Inventory	-	4,370	-	1,159	-	5,529

3.a. In the books of Mr. Snell :

Transaction / Event	Account Titles	Debit	Credit
		$	$
a.	Raw Materials Inventory	2,725
	Accounts Payable		2,725
b.	Work in Process Inventory	1,775
	Raw Materials Inventory		1,775
c.	Work in Process Inventory	3,460
	Wages Payable		3,460
d.	Work in Process Inventory	2,076
	Overhead		2,076
e.	Supplies	750
	Cash		750
f.	Overhead	2,500
	Wages Payable		2,000
	Supplies		500
g.	Administrative Expense	3,525
	Cash		3,525
h.	Finished Goods Inventory	7,677
	Work in Process Inventory		7,677
i.a.	Cash	6,125
	Accounts Receivable	1,750
	Sales		7,875
i.b.	Cost of Goods Sold	4,832
	Finished Goods Inventory		4,832

3.a. T charts :

Cash
Beg. bal.	17,750	e.	750
i.a	6,125	g.	3,525
End. bal	19,600
Raw Materials Inventory
Beg. bal.	2,250	b.	1,775
a.	2,725
End. bal.	3,200
Supplies Inventory
Beg. bal.	750	f.	500
e.	750
End. bal.	1,000
Work in Process Inventory
Beg. bal.	5,895	h.	7,677
b.	1,775
c.	3,460
d.	2,076
End. bal.	5,529
Finished Goods Inventory
Beg. bal.	$ 0	i.b.	4,832
h.	7,677
End. bal.	2,845
Cost of Goods Sold
Beg. bal.	0
i.b.	4,832
Underapplied Overhead	424
End. bal.	5,256
Overhead
Beg. bal	0	d.	2,076
f.	2,500
		Cost of Goods Sold	424
Accounts Receivable
Beg. bal.	0
i.a	1,750
End. bal.	1,750
Sales Revenue
		Beg. bal.	0
		i.a	7,875
		End. bal.	7,875
General Administrative Expenses
Beg. bal.	0
g.	3,525
End. bal	3,525
Accounts Payable
		Beg. bal.	0
		a.	2,725
		End. bal.	2,725
Wages Payable
		Beg. bal.	0
		c.	3,460
		f.	2,000
		End. bal.	5,460
Common Stock
		Beg. bal.	25,645
		End. bal.	25,645
Retained Earnings
		Beg. bal.	1,000
		End. bal.	1,000

4.

Statement of Cost of Goods Manufactured
	$	$
Direct Materials used
Beginning raw materials inventory	2,250
Add: Purchases	2,725
Less:	(3,200)	1,775
Direct labor		3,460
Overhead		2,076
Total Manufacturing Costs		7,311
Add: Beginning Work in Process Inventory		5,895
Total Cost of Work in Process		13,206
Less: Ending Work in Process Inventory		(5,529)
Cost of Goods Manufactured		7,677

5.

Statement of Cost of Goods Sold
Beginning Finished Goods Inventory	$ 0
Add: Cost of Goods Manufactured	7,677
Cost of Goods Available for Sale	7,677
Less: Finished Goods Inventory	(2,845)
Cost of Goods Sold ( Unadjusted )	4,832

6.

	Debit	Credit
Cost of Goods Sold	424
Overhead		424

7.

Income Statement For the month ended September 30
	$	$
Sales Revenue		7,875
Less: Cost of Goods Sold		5,256
Gross Profit		2,619
General and Administrative Expenses		3,525
Net income ( loss )		(906)

8.

Statement of Retained Earnings For the month ended September 30
Balance, August 31	1,000
Add: Net income ( loss )	(906)
Balance, September 30	94

9.

Balance Sheet September 30
Assets	$	Liabilities and Stockholders Equity	$
Cash	19,600	Accounts Payable	2,725
Accounts Receivable	1,750	Wages Payable	5,460
Raw Materials Inventory	3,200	Common Stock	25,645
Supplies Inventory	1,000	Retained Earnings	94
Work in Process Inventory	5,529
Finished Goods Inventory	2,845
Total Assets	$33,924	Total Liabilities and Stockholders Equity	$ 33,924

Part 2 :

Obviously Mr. Snell's bid is too high as compared to the competitor. In order to be competitive, he could consider the following:

• Adopt variable costing instead of normal costing for special orders.
• Adopt activity based costing in place of traditional costing method for allocation of overheads.
• Proprate overallocated / underallocated overheads to work in process inventory, finished goods inventory and cost of goods sold.
• Have a system of standard costing in place.