Question

Carpenter Cornices, Ltd., produces a wide variety of cornice moldings for windows at a plant located in Evergreen Park, Illinois. Because there are hundreds of products, some of which are made only to order, the company uses a job-order costing system. On July 1, the start of the company’s fiscal year, inventory account balances were as follows: Raw materials $ 12,700 Work in process $ 6,700 Finished goods $ 10,400 The company applies overhead cost to jobs on the basis of machine-hours. Its predetermined overhead rate for the fiscal year starting July 1 was based on a cost formula that estimated $191,400 of manufacturing overhead for an estimated activity level of 58,000 machine-hours. During the year, the following transactions were completed (Assume all purchases and services were acquired on account): a. Raw materials purchased on account, $202,000. b. Raw materials requisitioned for use in production, $164,000 (materials costing $152,500 were chargeable directly to jobs; the remaining materials were indirect). c. Costs for employee services were incurred as follows: Direct labor $ 111,000 Indirect labor $ 48,300 Sales commissions $ 34,500 Administrative salaries $ 53,500 d. Prepaid insurance expired during the year, $28,000 ($17,700 of this amount related to factory operations, and the remainder related to selling and administrative activities). e. Utility costs incurred in the factory, $25,500. f. Advertising costs incurred, $14,800. g. Depreciation recorded on equipment, $39,000. ($25,500 of this amount was on equipment used in factory operations; the remaining $13,500 was on equipment used in selling and administrative activities.) h. Manufacturing overhead cost was applied to jobs, $?. (The company recorded 31,000 machine-hours of operating time during the year.) i. Goods that had cost $326,000 to manufacture according to their job cost sheets were completed. j. Sales (all on account) to customers during the year totaled $614,000. These goods had cost $325,000 to manufacture according to their job cost sheets.1. 1.- Prepare journal entries to record the transactions for the year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Prepare T-accounts for inventories, Manufacturing Overhead, and Cost of Goods Sold. Post relevant data from your journal entries to these T-accounts (don’t forget to enter the opening balances in your inventory accounts). Compute an ending balance in each account. (Round your intermediate calculations to 2 decimal places.) 3-a. Is Manufacturing Overhead underapplied or overapplied for the year? (Round your intermediate calculations to 2 decimal places.) 3-b. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold. (Round your intermediate calculations to 2 decimal places. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Prepare an income statement for the year. (Round your intermediate calculations to 2 decimal places.)

Answer 1

Solution:

Part 1 --- Journal Entries

Transaction	Account Titles and Explanation	Debit	Credit
(a)	Raw materials inventory	$202,000
	Accounts Payable		$202,000
(b)	Work In Process Inventory (Direct materials)	$152,500
	Manufacturing Overhead (Indirect materials)	$11,500
	Raw materials Inventory		$164,000
c.	Work In Process Inventory (Direct labor)	$111,000
	Manufacturing Overhead (Indirect Labor)	$48,300
	Selling and Administrative Expenses (34500 + 53500)	$88,000
	Wages Payable		$247,300
d.	Manufacturing Overhead	$17,700
	Selling and Administrative Expenses	$10,300
	Prepaid Insurance		$28,000
e.	Manufacturing Overhead	$25,500
	Accounts Payable		$25,500
f.	Selling and Administrative Expenses	$14,800
	Accounts Payable		$14,800
g.	Manufacturing Overhead	$25,500
	Selling and Administrative Expenses	$13,500
	Accumulated Depreciation		$39,000
h.	Work In Process Inventory	$102,300
	Manufacturing Overhead		$102,300
i.	Finished Goods Inventory	$326,000
	Work In Process Inventory		$326,000
j(1).	Accounts Receivable	$614,000
	Sales Revenue		$614,000
j(2)	Cost of Goods Sold	$325,000
	Finished Goods Inventory		$325,000

Note 1 – Manufacturing Overhead Application Rate is calculated based on estimation.

Overhead Allocation Rate = Estimated Total Manufacturing Overhead / Estimated Machine Hours

= $191,400 / 58,000 MHs

=$3.30 per machine hour

Applied Manufacturing Overhead = Actual Machine Hours x Overhead Allocation Rate

= 31,000 MHs x $3.30

= $102,300

Part 2 – T-Accounts

Raw Materials Inventory
Beg. Bal.	$12,700	$164,000	(b)
(a) Purchases	$202,000
Ending Bal.	$50,700
Work in Process Inventory
Beg. Bal.	$6,700	$326,000	(h) Completed Jobs
(b) Material Used	$152,500
(c ) Direct labor	$111,000
(h) Applied MFR OH	$102,300
Ending Bal.	$46,500
Manufacturing Overhead
Beg. Bal.		$102,300	(h) Applied Overhead
(b) Indirect materials	$11,500
(c) Indirect labor	$48,300
(d) Prepaid Insurance	$17,700
(e) Utility Expense	$25,500
(g) Depreciation	$25,500
Ending Bal.	$26,200

Finished Goods Inventory
Beg. Bal.	$10,400	$325,000	j(2)
(h) Completed Jobs	$326,000
Ending Bal.	$11,400
Cost of Goods Sold
Beg. Bal.	0
j(2)	$325,000

Part 3-a --- Over or Under Applied Overhead

Applied Overheads are less than actual manufacturing overhead incurred.

It means Overheads are UNDER APPLIED.

Under Applied Overhead = $26,200

Part 3-b --- Journal Entry to close Manufacturing Overhead Account

Account Titles and Explanation	Debit	Credit
Cost of Goods Sold	$26,200
Manufacturing Overhead		$26,200

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