Question

Star Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1 are given below.

Star Videos, Inc.
Balance Sheet
January 1
Assets
Cash				$	78,600
Accounts receivable					103,400
Inventories:
Raw materials (film, costumes)	$	19,000
Videos in process		62,600
Finished videos awaiting sale		84,400			166,000
Prepaid insurance					9,250
Studio and equipment (net)					610,000
Total assets				$	967,250
Liabilities and Stockholders’ Equity
Accounts payable				$	175,000
Retained earnings					792,250
Total liabilities and stockholders’ equity				$	967,250

Because the videos differ in length and in complexity of production, the company uses a job-order costing system to determine the cost of each video produced. Studio (manufacturing) overhead is charged to videos on the basis of camera-hours of activity. The company’s predetermined overhead rate for the year ($40 per camera-hour) is based on a cost formula that estimated $280,000 in manufacturing overhead for an estimated allocation base of 7,000 camera-hours. Any underapplied or overapplied overhead is closed to cost of goods sold. The following transactions were recorded for the year:

Film, costumes, and similar raw materials purchased on account, $216,500.

Film, costumes, and other raw materials issued to production, $225,500 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect).

Utility costs incurred (on account) in the production studio, $87,000.

Depreciation recorded on the studio, cameras, and other equipment, $109,200. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration.

Advertising expense incurred (on account), $135,000.

Salaries and wages paid in cash as follows:

Direct labor (actors and directors)	$	95,400
Indirect labor (carpenters to build sets, costume designers, and so forth)	$	70,000
Administrative salaries	$	97,200

Prepaid insurance expired during the year, $8,100 (70% related to production of videos, and 30% related to marketing and administrative activities).

Miscellaneous marketing and administrative expenses incurred (on account), $13,350.

Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year.

Videos that cost $586,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.

Sales for the year totaled $986,000 and were all on account.

The total cost to produce the videos that were sold according to their job cost sheets was $632,470.

Collections from customers during the year totaled $936,000.

Payments to suppliers on account during the year, $598,000.

Underapplied or overapplied overhead $__?__.

Required:

1. Prepare a transaction analysis that records all of the above transactions.

2. Prepare a schedule of cost of goods manufactured for the year.

3. Prepare a schedule of cost of goods sold for the year.

4. Prepare an income statement for the year.

Answer 1

Solution:

Part 1 --- Journal Entries

Film, costumes, and similar raw materials purchased on account, $216,500

General Journal	Debit	Credit
Raw materials	$216,500
Accounts Payable		$216,500

Film, costumes, and other raw materials issued to production, $225,500 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect).

General Journal	Debit	Credit
Work In Process (225,500*85%)	$191,675
Factory Overhead (225,500*15%)	$33,825
Accounts Payable		$225,500

Utility costs incurred (on account) in the production studio, $87,000.

General Journal	Debit	Credit
Factory Overhead	87,000
Accounts Payable		87,000

Depreciation recorded on the studio, cameras, and other equipment, $109,200. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration.

General Journal	Debit	Credit
Factory Overhead (109,200*3/4 Depreciation)	81,900
Selling and Administrative Expense (109200*1/4)	27,300
Accumulated Depreciation - Equipment		109,200

Advertising expense incurred (on account), $135,000

General Journal	Debit	Credit
Selling and Administrative Expense	135,000
Accounts Payable		135,000

Salaries and wages paid in cash

General Journal	Debit	Credit
Work In Process (Direct labor)	95,400
Factory Overhead (indirect labor)	70,000
Selling and Administrative Expense	97,200
Cash		262,600

Prepaid insurance expired during the year, $8,100 (70% related to production of videos, and 30% related to marketing and administrative activities).

General Journal	Debit	Credit
Factory Overhead (8100*70%)	5,670
Selling and Administrative Expense (8100*30%)	2,430
Prepaid Insurance		8,100

Miscellaneous marketing and administrative expenses incurred (on account), $13,350.

General Journal	Debit	Credit
Selling and Administrative Expense	13,350
Accounts Payable		13,350

Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year.

General Journal	Debit	Credit
Work In Process (7,250 Camera Hours x Overhead Rate $40) (Refer Note 1)	$290,000
Factory Overhead		$290,000

Note 1 --- Overhead Rate

Overhead Rate = Estimated Manufacturing Overhead $280,000 / Estimated Camera Hours 7,000

= $40 per camera hour

Applied Manufacturing Overhead = Actual Camera Hour 7,250 x Overhead Rate $40 = $290,000

Videos that cost $586,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.

General Journal	Debit	Credit
Finished Goods	586,000
Work In Process		586,000

Sales for the year totaled $986,000 and were all on account.

General Journal	Debit	Credit
Accounts Receivable	986,000
Sales Revenue		986,000

The total cost to produce the videos that were sold according to their job cost sheets was $632,470.

General Journal	Debit	Credit
Cost of Goods Sold	$632,470
Finished Goods		632,470

Collections from customers during the year totaled $936,000.

General Journal	Debit	Credit
Cash	$936,000
Accounts Receivable		$936,000

Payments to suppliers on account during the year, $598,000.

General Journal	Debit	Credit
Accounts Payable	$598,000
Cash		$598,000

Underapplied or overapplied overhead

Applied Manufacturing Overhead (as per note 1) = $290,000

Total Factory Overhead Incurred

	$$
Indirect materials	$33,825
Utility Cost	$87,000
Depreciation	$81,900
Salaries and wages	$70,000
Insurance	$5,670
Actual Factory Overhead Incurred	$278,395

Applied Overheads are higher than actual incurred overhead, it means Overheads are OVERAPPLIED.

Over applied overhead = Applied Overhead $290,000 - $278,395 Actual Overhead Incurred

= $11,605

Over-Applied Overhead = $11,605

Part 2 --- schedule of cost of goods manufactured for the year.

Cost of Goods manufactured
	$$	$$
Work in Process, Beginning (Video in process)		$62,600
Direct Materials used	$191,675
Direct Labor	$95,400
Manufacturing Overhead Applied (Refer Note 1)	$290,000
Total Manufacturing Cost		$577,075
Total cost of work in process		$639,675
Less: Work in Process, Ending (62,600 + 577,075 - Completed 586,000)		$53,675
Cost of Goods manufactured (given)		$586,000

Part 3 -- schedule of cost of goods sold for the year.

Schedule of Cost of Goods Sold
	$$
Cost of Goods Manufactured (As per Part 2)	$586,000
Add: Beginning Finished Goods Inventory	$84,400
Cost of Goods Available for sale	$670,400
Less: Ending Finished Goods Inventory (Bal. fig)	$37,930
Unadjusted Cost of Goods Sold (before adjustment)	632,470
Less: Over-Applied Manufacturing Overhead	$11,605
Adjusted Cost of Goods Sold	$620,865

Part 4—Income Statement

Income Statement for the year
		$$
Sales Revenue		$986,000
Less: Adjusted Cost of Goods Sold (As per Part 3)		$620,865
Gross Profit		$365,135
Selling and Administrative Expenses:
Depreciation	$27,300
Advertising Expense	$135,000
Salaries and Wages	$97,200
Insurance Expense	$2,430
Miscellaneous marketing and administrative expenses	$13,350
Total Selling and administrative Expenses		$275,280
Operating Profit		$89,855

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