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 $75,000 of manufacturing overhead for an estimated activity level of $50,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,400
Work in process	$	4,100
Finished goods	$	8,800

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 165,000.
2. Raw materials used in production, $141,000 (materials costing $122,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	167,000
Indirect labor	$	170,700
Sales commissions	$	24,000
Administrative salaries	$	47,000

4. Rent for the year was $18,500 ($13,900 of this amount related to factory operations, and the remainder related to selling and administrative activities).
5. Utility costs incurred in the factory, $15,000.
6. Advertising costs incurred, $12,000.
7. Depreciation recorded on equipment, $20,000. ($18,000 of this amount related to equipment used in factory operations; the remaining $2,000 related to equipment used in selling and administrative activities.)
8. Record the manufacturing overhead cost applied to jobs.
9. Goods that had cost $230,000 to manufacture according to their job cost sheets were completed.
10. 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 $218,000.

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.

• Raw materials purchased on account, $165,000

	Transaction General Journal Debit Credit a.

• Raw materials used in production, $141,000 (materials costing $122,000 were charged directly to jobs; the remaining materials were indirect).

	Transaction General Journal Debit Credit b.

• Cost for employee services incurred as follows: Direct labor $167,000 Indirect labor $170,700 Sales commissions $24,000 Administrative salaries $47,000

	Transaction General Journal Debit Credit c.

• 
  Rent for during the year was $18,500 ($13,900 of this amount related to factory operations, and the remainder related to selling and administrative activities).

	Transaction General Journal Debit Credit d.

• Utility cost incurred in the factory, $15,000.

	Transaction General Journal Debit Credit e.

• Advertising cost incurred, $12,000.

	Transaction General Journal Debit Credit f.

• Depreciation recorded on equipment, $20,000. ($ 18,000 of this amount related to equipment used in factory operations; the remaining $ 2,000 related to equipment used in selling and administrative activities.)

	Transaction General Journal Debit Credit g.

• Record the manufacturing overhead cost applied to jobs.

	Transaction General Journal Debit Credit h.

• Goods that had cost $230,000 to manufacture according to their job cost sheets were completed.

	Transaction General Journal Debit Credit i.

• Sales for the year (all paid in cash) totaled $518,000

	Transaction General Journal Debit Credit j(1).

• The total cost to manufacture these goods according to their job cost sheets was $218,000.

	Transaction General Journal Debit Credit j(2).

Complete this question by entering your answers in the tabs below.

• Req 1
• Req 2
• Req 3A
• Req 3B
• Req 4

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). (Do not round intermediate calculations.)

Answer 1

journal entries

S.no	particular	Debit ($)	Credit ($)
1	Raw material inventory	165000
	Accounts payable		165000
2	work in process	122000
	Manufacturing OVERHEAD	19000
	RAW MATERIAL inventory		141000
3	work in process	167000
	Manufacturing OVERHEAD	170700
	Sales commission	24000
	Administrative salaries	47000
	Wages payable		408700
4	Manufacturing OVERHEAD	13900
	Rental expenses	4600
	Rental payable		18500
5	Manufacturing OVERHEAD	15000
	Accounts payable		15000
6	advertising expenses	12000
	Accounts payable		12000
7	Manufacturing OVERHEAD	18000
	Depreciation	2000
	Accumulated depreciation		20000
8	work in process (note below)	250500
	Manufacturing OVERHEAD		250500
9	finished goods	230000
	Work in process		230000
10	Accounts receivable	518000
	Sales		518000
11	cost of goods sold	218000
	Finished goods		218000

note: PRE DETERMINED overhead rate= $75000/$50000= $1.5

applied overhead= $167000×$1.5=$250500

T Accounts

RAW MATERIAL inventory

Beginning balance	10400	work in process	122000
Accounts payable	165000	Manufacturing OVERHEAD	19000
		Balance	34400

Work in process

Beginning balance	4100	finished goods	230000
Raw material inventory	122000
Wages payable	167000	balance	313600
Manufacturing overhead	250500

  

Manufacturing overhead

RAW MATERIAL inventory	19000	work in process	250500
Wages payable	170700
Rental payable	13900
Accounts payable	15000
Accumulated depreciation	18000
Balance (overapplied)	13900

  finished goods

Beginning balance	8800	cost of goods sold	218000
Work in process	230000	balance	20800

  cost of goods sold

Finished goods	218000	Manufacturing (overapplied)	13900
		Balance	204100

3a) Manufacturing OVERHEAD appiled= actual overhead - applied overhead

= $236600 - $250500

= $13900

3b) Manufacturing OVERHEAD dr $13900

Cost of goods sold. Cr. $13900

4). INCOME STATEMENT

Particular	amount ($)
Sales	518000
(-) cost of goods sold	(204100)
Gross profit	313900
(-) expenses
Sales commission	(24000)
Administrative salaries	(47000)
Rent	(4600)
Advertising	(12000)
Depreciation	(2000)
NET operating income	224300

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