Question

PROBLEM TWO

Mr. Radiance, 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                                         $ 16,890

            Raw Materials Inventory           $   2,150

            Supplies Inventory                   $      620

            Work in Process Inventory        $     ????

            Finished Goods Inventory         $          0            Stockholders’ Equity???

The subsidiary ledgers for work in process are as follows:

            Job                   Materials          Labor               Overhead

            A-3                   $ 750              $1,100             $ 550

            A-4                       900                    650                  325

            A-5                     325                    700                  350

-Other items of importance are:

-$1,675 of raw materials were purchased during the month

-Raw materials listed were used; A-3 $280, A-4 $350. A-5 $520, A-6 $375, A-7 $250.

-Supplies of $580 were purchased, while $490 were used.

-Direct labor was $3,460; A-3 $750, A-4 $1,300. A-5 $550, A-6 $490, A-7 $370.

-Indirect labor was $2,000.

-Overhead is applied to production; overhead is applied as 50% of direct labor cost.

-General administrative expenses for the month were $3,420.

-Jobs A-3, A-5, and A-6 were finished. A-3 and A-5 were sold for $6,125, and $1,750, respectively.

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) Show in a ledger the transactions 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. Radiance studied the plan and figured cost would be:

            Lumber                        $   590

            Finishing materials              75

            Labor                                640

            Overhead                          320

            Total                            $1,625

               With markup of 15%, the price would be $1,900.

Mrs. Smith was incensed stating that a competitor down the street, Ms. Jones, quoted a price of $1,600. It is true that Radiance does not want to lay off workers during slow times. What recommendation would you make? Why?

Answer 1

1..Balance Sheet as at 31, August
Assets		Liabilities
Cash	16890	Stockholder's equity	25310
Raw materials Inventory	2150
Supplies Inventory	620
WIP inventory(A3+A4+A5)	5650
Finished Goods Inventory	0
	25310		25310

2.. Job Cost Sheets
	A-3	A-4	A-5	A-6	A-7	Total
Beginning WIP (DM+DL+OH)	2400	1875	1375			5650
Incurred During September
Raw materials used	280	350	520	375	250	1775
Direct labor	750	1300	550	490	370	3460
OH 50%*DL	375	650	275	245	185	1730
Total	3805	4175	2720	1110	805	12615

4...Cost of Goods Manufactured in September
Beginning WIP:
A-3	2400
A-4	1875
A-5	1375	5650
Add: Raw materials used		1775
Direct labor		3460
OH applied		1730
		12615
Less: Ending WIP
A-4	4175
A-7	805	4980
Cost of Goods Manufactured(A-3, A-5 & A-6)		7635

5. COGS for September
Beginning Finished goods	0
Add: COGM in Sep.	7635
Less: Ending Finished goodsA-6)	1110
COGS(A-3& A-5)	6525
6. Overheads incurred in Sep.
Supplies	490
Ind.Labor	2000
Total	2490
OH applied	1730
So, under-applied OH=(2490-1730)=	760
COGS	760
Mfg. OH		760
So, now COGS=6525+760=
7285
7.. Income statement for September
Sales (6125+1750)	7875
Less: COGS	7285
Gross Profit	590
General admn. OH	3420
Net Loss	-2830
8. Statement of retained earnings
Stockholder's equity	25310
Net Loss	-2830
Ending Stockholder's equity	22480

4. Ledger accounts
Cash
Opening Balance	16890
Sales	7875
Raw materials		1675
Supplies		580
Labor		3460
Indirect labor		2000
Gen. admn,. Oh		3420
Ending Balance		13630

9..Balance Sheet as at 31, August
Assets		Liabilities
Cash	13630	Stockholder's equity	22480
Raw materials Inventory(2150+1675-1775)	2050
Supplies Inventory(620+580-490)	710
WIP inventory(A4&A7)	4980
Finished Goods Inventory(A6)	1110
	22480		22480

10..Under applied OH	760			Revised value
Balances in
WIP	4980	4980/12615*760=	300	5280
Fin.gds.	1110	1110/12615*760=	67	1177
COGS	6525	6525/12615*760=	393	6918
Total	12615		760	13375