Question

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 $67,500 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 $ 10,600 Work in process $ 4,700 Finished goods $ 8,100

During the year, the following transactions were completed:

A: Raw materials purchased for cash, $ 166,000.

B: Raw materials used in production, $147,000 (materials costing $124,000 were charged directly to jobs; the remaining materials were indirect).

C: Cash paid to employees as follows:

Direct labor $ 159,000 Indirect labor $ 158,400 Sales commissions $ 23,000 Administrative salaries $ 48,000

D: Cash paid for rent during the year was $18,400 ($13,700 of this amount related to factory operations, and the remainder related to selling and administrative activities).

E: Cash paid for utility costs in the factory, $13,000.

F: Cash paid for advertising, $11,000.

G: Depreciation recorded on equipment, $21,000. ($17,000 of this amount related to equipment used in factory operations; the remaining $4,000 related to equipment used in selling and administrative activities.)

H: Manufacturing overhead cost was applied to jobs, $ ? .

I: Goods that had cost $228,000 to manufacture according to their job cost sheets were completed.

J: 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 $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.

Transaction	General Journal	Debit	Credit
a.	Raw Materials	166000
	Cash		166000
	(To record materials purchased for cash)
b.	Work in process	124000
	Manufacturing overheads	23000
	Raw Materials		147000
	(To record raw materials requisitioned)
c.	Work in process	159000
	Manufacturing overheads	158400
	Sales commission expense	23000
	Administrative salaries expense	48000
	Cash		388400
	(To record cost of employee services incurred)
d.	Manufacturing overheads	13700
	Rent expense	4700
	Cash		18400
	(To record rent incurred)
e.	Manufacturing overheads	13000
	Cash		13000
	(To record utilities costs incurred)
f.	Advertising expense	11000
	Cash		11000
	(To record advertising costs incurred)
g.	Manufacturing overheads	17000
	Depreciation expense	4000
	Accumulated depreciation-equipment		21000
	(To record depreciation on equipment)
h.	Work in process	238500
	Manufacturing overheads (150% x $159000)		238500
	(To record manufacturing overhead applied to jobs)
i.	Finished goods	228000
	Work in process		228000
	(To record cost of jobs completed and transferred)
j(1)	Cash	518000
	Sales Revenue		518000
	(To record cash sales)
j(2)	Cost of goods sold	217000
	Finished goods		217000
	(To record cost of goods sold)

Predetermined manufacturing overhead rate = Total estimated manufacturing overhead/Total estimated direct labor cost = $67500/$45000 = 150% of direct labor cost

2.

Raw Materials
	Debit	Credit
Beg. Bal.	10600	147000	b.
a.	166000
End. Bal.	29600
Work in Process
	Debit	Credit
Beg. Bal.	4700	228000	i.
b.	124000
c.	159000
h.	238500
End. Bal.	298200
Finished Goods
	Debit	Credit
Beg. Bal.	8100	217000	j(2)
i.	228000
End. Bal.	19100
Manufacturing Overhead
	Debit	Credit
b.	23000	238500	h.
c.	158400
d.	13700
e.	13000
g.	17000
End. Bal.		13400
Cost of Goods Sold
	Debit	Credit
j(2)	217000
End. Bal.	217000

3-a. Overapplied

Manufacturing overhead incurred $225100 - Manufacturing overhead applied $238500 = Overheads overapplied $13400

3-b.

General Journal	Debit	Credit
Manufacturing overheads	13400
Cost of goods sold		13400
(To close manufacturing overheads to cost of goods sold)

4.

Gold Nest Company
Income Statement
For the Year Ended
Sales		518000
Cost of goods sold ($217000 - $13400)		203600
Gross profit		314400
Selling and administrative expenses:
Sales commission expense	23000
Advertising expense	11000
Administrative salaries expense	48000
Rent expense	4700
Depreciation expense	4000
Total selling and administrative expenses		90700
Net income		223700