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 $84,000 of manufacturing overhead for an estimated activity level of $40,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,200
Work in process	$	4,700
Finished goods	$	8,300

During the year, the following transactions were completed:

Raw materials purchased for cash, $ 165,000.

Raw materials used in production, $141,000 (materials costing $125,000 were charged directly to jobs; the remaining materials were indirect).

Cash paid to employees as follows:

Direct labor	$	159,000
Indirect labor	$	256,500
Sales commissions	$	30,000
Administrative salaries	$	42,000

Cash paid for rent during the year was $18,900 ($13,600 of this amount related to factory operations, and the remainder related to selling and administrative activities).

Cash paid for utility costs in the factory, $19,000.

Cash paid for advertising, $13,000.

Depreciation recorded on equipment, $21,000. ($15,000 of this amount related to equipment used in factory operations; the remaining $6,000 related to equipment used in selling and administrative activities.)

Manufacturing overhead cost was applied to jobs, $ ? .

Goods that had cost $226,000 to manufacture according to their job cost sheets were completed.

Sales for the year (all paid in cash) totaled $509,000. The total cost to manufacture these goods according to their job cost sheets was $220,000.

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.

a. Raw Materials. .................................................................... 165000

              Cash. ...........................................................................                    165000

b. Work in Process. ................................................................. 125000

    Manufacturing Overhead. ....................................................   16000

             Raw Materials. .............................................................                     141000

c. Work in Process. ................................................................. 159000

    Manufacturing Overhead. .................................................... 256500

    Sales Commissions Expense. .............................................   30000

    Salaries Expense. ...............................................................    42000

              Cash. ...........................................................................                      487500

d. Manufacturing Overhead. ....................................................    13600

    Rent Expense. .....................................................................      5300

              Cash. ...........................................................................                       18900

e. Manufacturing Overhead. ....................................................      19000

              Cash. ...........................................................................                         19000

f. Advertising Expense. ..........................................................       13000

              Cash. ...........................................................................                        13000

g. Manufacturing Overhead. ....................................................        15000

    Depreciation Expense .............................................................    6000

              Accumulated Depreciation ............................................                        21000

h. Work in Process .........................................................................   333900

              Manufacturing Overhead. ....................................................     333900

Predetermined OH rate = Estimated total manufacturing OH cost/Estimated total amount of the allocation base

= 84000/40000 direct labour cost = 210% of direct labour cost

159000 actual direct labour cost x 210% = 333900

i. Finished goods .........................................................226000

            Work in Process ............................................                  226000

j. Cash .........................................................................509000

         Sales .....................................................................                509000

Cost of Goods Sold ..................................................... 220000

          Finished Goods ..................................................                     220000

2.

3A. Manufacturing OH is over-applied by 13800 for the year.

3B. The entry to close this balance to COGS would be:

Manufacturing OH ......................................13800

     COGS .......................................................       13800

4.