Question

Froya Fabrikker A/S of Bergen, Norway, is a small company that manufactures specialty heavy equipment for use in North Sea oil fields. The company uses a job-order costing system that applies manufacturing overhead cost to jobs on the basis of direct labor-hours. Its predetermined overhead rate was based on a cost formula that estimated $388,800 of manufacturing overhead for an estimated allocation base of 810 direct labor-hours. The following transactions took place during the year:

Raw materials purchased on account, $295,000.

Raw materials used in production (all direct materials), $280,000.

Utility bills incurred on account, $78,000 (95% related to factory operations, and the remainder related to selling and administrative activities).

Accrued salary and wage costs:

Direct labor (890 hours)	$	325,000
Indirect labor	$	109,000
Selling and administrative salaries	$	205,000

Maintenance costs incurred on account in the factory, $73,000

Advertising costs incurred on account, $155,000.

Depreciation was recorded for the year, $91,000 (80% related to factory equipment, and the remainder related to selling and administrative equipment).

Rental cost incurred on account, $105,000 (85% related to factory facilities, and the remainder related to selling and administrative facilities).

Manufacturing overhead cost was applied to jobs, $ ? .

Cost of goods manufactured for the year, $960,000.

Sales for the year (all on account) totaled $2,150,000. These goods cost $990,000 according to their job cost sheets.

The balances in the inventory accounts at the beginning of the year were:

Raw Materials	$	49,000
Work in Process	$	40,000
Finished Goods	$	79,000

Required:

1. Prepare journal entries to record the preceding transactions.

2. Post your entries to T-accounts. (Don’t forget to enter the beginning inventory balances above.)

3. Prepare a schedule of cost of goods manufactured.

4A. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

4B. Prepare a schedule of cost of goods sold.

5. Prepare an income statement for the year.

Answer 1

Note 1: Predetermined rate of factory overhead= 388800/810=480$per labour hour

Manufacturing overhead for the job=480*890hour=427200$

Attached images contain journal entries and T-account

3 Cost of goods manufacture=opening WIP+material used+labour used+overhead used-closing WIP

40000+280000+325000+427200-112200=960000

(we can simply say that cost of goods manufacture is the cost of finished goods that transfer from WIP to Finished good)

4A. journal entry for balance in factory overhead to COGS:

Debit Credit

Factory oveerhead 9050 (this amount is the balance figure of Factory overhead account)

COGS 9050

4B schedule of COGS:

Opening FG 79000

Add:cost of manufactured 960000

Less:closing FG (49000)

Less:overapplied overhead (9050)

Adjusted COGS 980950