Question

Craftsman manufactures customized household furnishings. The company uses a perpetual inventory system and has a highly labour intensive production process, so it assigns manufacturing overhead based on direct labour cost.

Craftsman predetermined overhead application rate for 2012 was computed from the following data:

Total estimated factory overhead $480,000

Total estimated direct labour cost $800,000

The following events occurred during May 2012.

i) Purchased materials on account, $405,000

ii) Incurred manufacturing wages of $111,600

iii) Requisitioned direct materials and used direct labour in manufacturing

Direct Materials Direct Labour

$ $

Job 101 41,320 56,800

Job 102 62,100 66,000

Job 103 14,800 28,700

Job 104 19,200 21,000

iv) Issued indirect materials to production, $6,600

v) Charged indirect manufacturing wages to production, $27,900

vi) Other manufacturing overhead costs incurred on units 101 to 104 amounted to $29,800

vii) Allocated overheads to jobs at the predetermined rate

viii) Units completed: 101, 103 & 104

ix) Sold units 101 & 104 (billed customers at a mark-up of 45% on cost)

Required:

(a) Compute Craftsman’s predetermined manufacturing overhead rate for 2012.

b) State the journal entries necessary to record the above transactions in the general journal.

(c) Calculate the manufacturing overhead variance for Craftsman and state the journal entries necessary to dispose of the variance.

(d) What is balance on the Cost of Goods Sold account after the adjustment

(e) Open T-accounts for Work in Process Inventory and Finished Goods Inventory. Post the appropriate entries to these accounts, identifying each entry by number. Determine the ending balances, assuming that the beginning balances were zero.

Answer 1

a. Predetermined manufacturing overhead rate = Total estimated factory overhead/Total estimated direct labor cost = $480000/$800000 = 60% of direct labor cost

b. Journal entries:

Transaction	Account Titles and Explanation	Debit	Credit
i	Raw Materials inventory	405000
	Accounts Payable		405000
	(To record materials purchased on account)
ii	Wages expense	111600
	Wages payable		111600
	(To record manufacturing wages incurred)
iii	Work in process inventory	309920
	Raw Materials inventory		137420
	Wages expense/payable		172500
	(To record materials and direct labor used)
iv	Manufacturing overheads	6600
	Raw Materials inventory		6600
	(To record indirect materials used)
v	Manufacturing overheads	27900
	Wages expense/payable		27900
	(To record indirect labor assigned)
vi	Manufacturing overheads	29800
	Cash/Accounts payable		29800
	(To record other manufacturing overheads incurred)
vii	Work in process inventory	103500
	Manufacturing overheads (60% x $172500)		103500
	(To record manufacturing overhead allocated)
viii	Finished goods inventory	245720
	Work in process inventory		245720
	(To record cost of jobs completed and transferred)
ix	Accounts Receivable	268250
	Sales Revenue		268250
	(To record sale on account)
ix	Cost of goods sold	185000
	Finished goods inventory		185000
	(To record cost of sales)

Note: Since the direct and indirect labor used is more than the manufacturing wages assigned, it is credited to wages expense to extent incurred and additional may be credited to wages payable.

Working:

	Jobs				Total
	101	102	103	104
Direct materials	41320	62100	14800	19200	137420
Direct labor	56800	66000	28700	21000	172500
Manufacturing overhead (60%)	34080	39600	17220	12600	103500
Total cost $	132200	167700	60720	52800	413420
Mark-up (45%)	59490			23760
Sales $	191690			76560

c. Manufacturing overhead variance = Overhead incurred - Overhead applied = $64300 - $103500 = $39200 Favorable

d. Cost of goods sold (adjusted) = $185000 - $39200 = $145800

e.

Work in Process Inventory
	Debit	Credit
Beg. Bal.	0
iii	309920	245720	viii
vii	103500
End. Bal.	167700
Finished Goods Inventory
	Debit	Credit
Beg. Bal.	0
viii	245720	185000	ix
End. Bal.	60720