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 $380,000 of manufacturing overhead for an estimated allocation base of 1,000 direct labor-hours. The following transactions took place during the year:

Raw materials purchased on account, $275,000.

Raw materials used in production (all direct materials), $260,000.

Utility bills incurred on account, $74,000 (95% related to factory operations, and the remainder related to selling and administrative activities).

Accrued salary and wage costs:

Direct labor (1,100 hours)	$	305,000
Indirect labor	$	105,000
Selling and administrative salaries	$	185,000

Maintenance costs incurred on account in the factory, $69,000

Advertising costs incurred on account, $151,000.

Depreciation was recorded for the year, $87,000 (80% related to factory equipment, and the remainder related to selling and administrative equipment).

Rental cost incurred on account, $112,000 (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, $920,000.

Sales for the year (all on account) totaled $1,950,000. These goods cost $950,000 according to their job cost sheets.

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

Raw Materials	$	45,000
Work in Process	$	36,000
Finished Goods	$	75,000

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

1. In the books of Froya Fabrikker A/S:

Transaction / Event	General Journal	Debit	Credit
		$	$
a.	Raw Materials Inventory	275,000
	Accounts Payable		275,000
b.	Work in Process Inventory	260,000
	Raw Materials Inventory		260,000
c.	Manufacturing Overhead	70,300
	Utilities Expense	3,700
	Accounts Payable		74,000
d.	Work in Process Inventory	305,000
	Manufacturing Overhead	105,000
	Salaries Expense	185,000
	Salaries and Wages Payable		595,000
e.	Manufacturing Overhead	69,000
	Accounts Payable		69,000
f.	Advertising Expense	151,000
	Accounts Payable		151,000
g.	Manufacturing Overhead	69,600
	Depreciation Expense	17,400
	Accumulated Depreciation : Equipment		87,000
h.	Manufacturing Overhead	95,200
	Rent Expense	16,800
	Accounts Payable		112,000
i.	Work in Process Inventory ( $ 380,000 / 1,000 x 1,100)	418,000
	Manufacturing Overhead		418,000
j.	Finished Goods Inventory	920,000
	Work in Process Inventory		920,000
k.	Accounts Receivable	1,950,000
	Sales		1,950,000
	Cost of Goods Sold	950,000
	Finished Goods Inventory		950,000

2. Raw Materials Inventory:

Beginning balance	45,000	Work in Process Inventory	260,000
Accounts Payable	275,000
Ending balance	60,000

Work in Process Inventory:

Beginning balance	36,000	Finished Goods Inventory	920,000
Raw Materials Inventory	260,000
Salaries and Wages Payable	305,000
Manufacturing Overhead	418,000
Ending balance	99,000

Finished Goods Inventory:

Beginning balance	75,000	Cost of Goods Sold	950,000
Work in Process Inventory	920,000
Ending balance	45,000

Cost of Goods Sold:

Finished Goods Inventory	950,000	Manufacturing Overhead	8,900
Ending Balance	941,100

Manufacturing Overhead:

Indirect Labor	105,000	Work in Process Inventory	418,000
Factory Utilities	70,300
Factory Rent	95,200
Accumulated Depreciation	69,600
Factory Maintenance	69,000
Overapplied	8,900
	418,000		418,000

Sales:

		Accounts Receivable	1,950,000

3. Froya Fabrikker A/S

Schedule of Cost of Goods Manufactured

For the year ended........

	$	$
Work in Process, beginning		36,000
Raw Materials issued to production
Beginning balance	45,000
Add: Purchases	275,000
Less: Ending balance	(60,000)	260,000
Direct Labor		305,000
Manufacturing Overhead		418,000
Total Work in Process		1,019,000
Less: Work in Process, Ending		(99,000)
Cost of Goods Manufactured		920,000

4A.

Account Titles	Debit	Credit
Manufacturing Overhead	8,900
Cost of Goods Sold		8,900

4B. Froya Fabrikker

Schedule of Cost of Goods Sold

For the year ended.....

	$
Finished Goods, beginning	75,000
Cost of Goods Manufactured	920,000
Cost of Goods Available for Sale	995,000
Less: Finished Goods, ending	(45,000)
Cost of Goods Sold ( Unadjusted)	950,000
Manufacturing Overhead Overapplied	(8,900)
Cost of Goods Sold ( Adjusted)	941,100

5. Froya Fabrikker A/S

Income Statement

For the year ended.....

	$	$
Sales		1,950,000
Cost of Goods Sold		941,100
Gross Profit		1,008,900
Selling and Administrative Expenses
Advertising Expense	151,000
Salaries Expense	185,000
Utilities Expense	3,700
Rent Expense	16,800
Depreciation Expense	17,400
Total Selling and Administrative Expense		373,900
Net Operating Income		635,000