Question

Sampson Company uses a job order cost system with overhead applied to products based on direct labor hours. Based on previous history, the company estimated its total overhead for the coming year (2016) to be $720000 and its total direct labor hours to be 24000. On January 1, 2010 the general ledger of Sampson Company revealed that it had one job in process (Job 102) for which it had incurred a total cost of $15,000. Job 101 had been finished the previous month for a total cost of $30,000 but was not yet sold. The company had a contract for Job 103 but had not started working on it yet. Other balances in Raw Materials Inventory and other assets, liabilities, and owner’s equity accounts are summarized here :

SAMPSON COMPANY General Ledger Accounts Raw Material Inventory Date Description Dr Cr Balance 1/1 Balance 10,000 (Dr) Work In Process Inventory (WIP) Date Description Dr Cr Balance 1/1 Balance 15,000 (Dr) Sales Revenue Date Description Dr Cr Balance Cash and other assets Date Description Dr Cr Balance 1/1 Balance 100,000 (Dr) Manufacturing Overhead Date Description Dr Cr Balance Finished Goods Inventory Date Description Dr Cr Balance 1/1 Balance 30,000(Dr) Cost of Goods Sold Date Description Dr Cr Balance Selling and administrative Expenses Date Description Dr Cr Balance Payables and Other Liabilities Date Description Dr Cr Balance 1/1 Balance 85,000 (Cr) Stockholders Equity Date Description Dr Cr Balance 1/1 Balance 70,000 (Cr) Individual Job Cost Sheets (subsidiary ledgers to WIP) Job 102 Job 103 Beginning Balance 15,000 - + Direct Materials + Direct Labor + Applied OH Total Manufacturing Cost During January, the company had the following transactions: (a) Purchased $10,000 worth of raw materials on account (b) Issued the following materials into production: Item Cost Explanation Direct Materials $7,000 Job 102,$2,000; Job 103,$5,000 Indirect Materials 2,000 Used on both jobs Total material issued $9,000 ( c ) Recorded salaries and wages payable as follows : Item Cost Explanation Direct Labor $10,000 Job 102,$6,000; Job 103,$4,000 Indirect Labor 4,000 For Factory supervision Salaries 5,000 For administrative staff Total Payroll cost $19,000 (d) Applied overhead to jobs based on the number of direct labor hours required : Job number Direct Labor Hours Job 102 300 hours Job 103 200 hours Total 500 hours (e) Recorded the following actual manufacturing costs: Item Cost Explanation Rent $6,000 Paid factory rent in cash Depreciation 5,000 Factory Equipment Insurance 3,000 Had one month of factory insurance policy expire Utilities 2,000 Received factory utility bill but did not pay it Total Cost $16,000 (f) Recorded the following general and administrative cost : Item Cost Explanation Advertising $2,000 Advertising paid in cash Depreciation 3,000 Office Equipment Other expenses 1,000 Micellaneous expenses incurred but not paid. Total Cost $6,000 (g) Sold Job 101, which is recorded in Finished Goods Inventory at a cost of $30,000 for $55,000 (h) Completed Job 102 but did not sell it; Job 103 is still in process at year-end. Required : 1. Compute and interpret the predetermined overhead rate. 2. How much overhead would be applied to jobs during the period? 3. Compute the total cost of Jobs 102 and 103 at the end of the period. Where would the cost of each of these jobs appear on the year-end balance Sheet? 4. Prepare journal entries to record the January transaction and post the entries to the general ledger T-accounts OR column accounts as given earlier in the problem. 5. Calculate the amount of over or underapplied overhead. 6. Prepare the journal entry to dispose of the overhead balance assuming that it had been a year-end balance instead of a month-end balance. Post the effect to the general ledger T-accounts/column accounts. 7. Prepare a statement of cost of goods manufactured and sold report including the adjustment for over or underapplied overhead. 8. Prepare a brief income statement for Sampson Company.

Answer 1

1. Predetermined Overhead Rate = Estimated Total Overhead / Estimated Direct Labor Hours = $ 720,000 / 24,000 = $ 30 per direct labor hour.

For every direct labor hour expended on a job, the amount of manufacturing overhead to be applied on the job will be $ 30.

2. Amount of overhead to be applied to jobs during the period = $ 30 x 500 direct labor hours = $ 15,000.

3. Job Cost Sheet:

	Job 102	Job 103	Total
	$	$	$
Balance, 1/1	15,000	0	15,000
Costs added during January :
Direct Materials	2,000	5,000	7,000
Direct Labor	6,000	4,000	10,000
Manufacturing Overhead	9,000	6,000	15,000
Total Manufacturing Costs during January	17,000	15,000	32,000
Cost of Goods Manufactured	(32,000)	0	(32,000)
Bal 1/31	0	15,000	15,000

4.

Journal Entries:

Transaction / Event	Account Titles	Debits	Credits
		$	$
a.	Raw Materials Inventory	10,000
	Accounts Payable		10,000
b.	Work in Process Inventory	7,000
	Manufacturing Overhead	2,000
	Raw Materials Inventory		9,000
c.	Work in Process Inventory	10,000
	Manufacturing Overhead	4,000
	Salaries Expense	5,000
	Salaries and Wages Payable		19,000
d.	Work in Process Inventory	15,000
	Manufacturing Overhead		15,000
e.	Manufacturing Overhead	16,000
	Cash		6,000
	Accumulated Depreciation : Equipment		5,000
	Prepaid Insurance		3,000
	Accounts Payable		2,000
f.	Advertising Expense	2,000
	Depreciation Expense : Office Equipment	3,000
	Miscellaneous Expense	1,000
	Cash		2,000
	Accumulated Depreciation : Office Equipment		3,000
	Accrued Liabilities		1,000

Contd.

g.	Accounts Receivable	55,000
	Sales Revenue		55,000
g.	Cost of Goods Sold	30,000
	Finished Goods Inventory		30,000
h.	Finished Goods Inventory	32,000
	Work in Process Inventory		32,000

Raw Materials

Bal 1/1	10,000	Work in Process Inventory	7,000
Accounts Payable	10,000	Manufacturing Overhead	2,000
Bal 1/31	11,000

Work in Process:

Bal 1/1	15,000	Finished Goods Inventory	32,000
Direct Materials	7,000
Direct Labor	10,000
Manufacturing Overhead	15,000
Bal 1/31	15,000

Finished Goods Inventory:

Bal 1/1	30,000	Cost of Goods Sold	30,000
Work in Process Inventory	32,000
Bal 1/31	32,000

Cost of Goods Sold

Bal 1/1	???
Finished Goods Inventory	30,000
Manufacturing Overhead	7,000

Manufacturing Overhead

Indirect Materials	2,000	Overhead Applied	15,000
Indirect Labor	4,000
Other Manufacturing Costs	16,000	Underapplied	7,000
Total	22,000		22,000

5. Manufacturing Overhead Underapplied : $ 7,000.

6.

	Debit	Credit
Cost of Goods Sold	7,000
Manufacturing Overhead		7,000