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 $85,000 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	$	10,900
Work in process	$	4,200
Finished goods	$	8,700

During the year, the following transactions were completed:

Raw materials purchased for cash, $ 163,000.

Raw materials used in production, $143,000 (materials costing $129,000 were charged directly to jobs; the remaining materials were indirect).

Cash paid to employees as follows:

Direct labor	$	166,000
Indirect labor	$	207,700
Sales commissions	$	24,000
Administrative salaries	$	41,000

Cash paid for rent during the year was $18,800 ($13,100 of this amount related to factory operations, and the remainder related to selling and administrative activities).

Cash paid for utility costs in the factory, $17,000.

Cash paid for advertising, $14,000.

Depreciation recorded on equipment, $25,000. ($16,000 of this amount related to equipment used in factory operations; the remaining $9,000 related to equipment used in selling and administrative activities.)

Manufacturing overhead cost was applied to jobs, $ ? .

Goods that had cost $227,000 to manufacture according to their job cost sheets were completed.

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 $217,000.

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)	Journal Entries
Date	Account Titles and Explanation	Debit	Credit
a)	Raw materials	$163,000
	Cash		$163,000
b)	Work in progress	$129,000
	Manufacturing overhead	$14,000
	Raw Material		$143,000
c)	Work in progress	$166,000
	Manufacturing overhead	$207,700
	Sales commissions Expense	$24,000
	Salaries Expense	$41,000
	Cash		$438,700
d)	Manufacturing overhead	$13,100
	Rent Expenses	$5,700
	Cash		$18,800
e)	Manufacturing overhead	$17,000
	Cash		$12,000
f)	Advertisement Expenses	$14,000
	Cash		$14,000
g)	Manufacturing overhead	$16,000
	Depreciation Expenses	$9,000
	Cash		$25,000
h)	Work in progress (170% x $166,000) Actual direct labour	$282,200
	Manufacturing overhead		$282,200
	Predetermined Rate = $85000/$50000 Direct labour cost	170.00%	Direct labour cost
i)	Finished goods	$227,000
	Work in Progress		$227,000
j)	Cash	$518,000
	Sales		$518,000
	Cost of Goods Sold	$217,000
	Finished Goods		$217,000