Question

Problem 3-16 Comprehensive Problem [LO3-1, LO3-2, LO3-4]

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 $94,500 of manufacturing overhead for an estimated activity level of $45,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,300
Work in process	$	5,000
Finished goods	$	8,800

During the year, the following transactions were completed:

Raw materials purchased for cash, $ 167,000.

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	$	151,000
Indirect labor	$	241,600
Sales commissions	$	28,000
Administrative salaries	$	43,000

Cash paid for rent during the year was $18,800 ($13,600 of this amount related to factory operations, and the remainder related to selling and administrative activities).

Cash paid for utility costs in the factory, $18,000.

Cash paid for advertising, $14,000.

Depreciation recorded on equipment, $22,000. ($16,000 of this amount related to equipment used in factory operations; the remaining $6,000 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 $507,000. The total cost to manufacture these goods according to their job cost sheets was $220,000.

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

Solution:

Part 1 – Journal entries

Transaction	General Journal	Debit	Credit
a	Raw materials inventory	$167,000
	Cash		$167,000
b	Work In Process Inventory (Direct materials)	$129,000
	Manufacturing Overhead (indirect materials)	$14,000
	Raw Materials Inventory		$143,000
c	Work in Process (Direct labor)	$151,000
	Manufacturing Overhead (Indirect labor)	$241,600
	Selling and Administrative Overhead (28000 + 43000)	$71,000
	Cash		$463,600
d	Manufacturing Overhead (Rent related to factory)	$13,600
	Selling and Administrative Overhead (Other Rent)	$5,000
	Cash		$18,600
e	Manufacturing Overhead (Utility Cost)	$18,000
	Cash		$18,000
f	Selling and Administrative Overhead (advertising expense)	$14,000
	Cash		$14,000
g	Manufacturing Overhead (depreciation for equipment used in factory operation)	$16,000
	Selling and Administrative Expenses (bal. fig)	$6,000
	Accumulated Depreciation		$22,000
h	Work In Process Inventory (Refer Note 1)	$317,100
	Manufacturing Overhead (Applied)		$317,100
i	Finished Goods Inventory	$227,000
	Work In Process Inventory		$227,000
j(1)	Cash	$507,000
	Sales Revenue		$507,000
j(2)	Cost of Goods Sold	$220,000
	Finished Goods Inventory		$220,000

Part 2 – T-Accounts

Raw Materials Inventory
Beg. Bal.	$10,300	$129,000	Work in process
Purchases for cash	$167,000	$14,000	Manufacturing Overhead
Ending bal	$34,300
Manufacturing Overhead
Indirect materials	$14,000	$317,100	Work In Process (Applied Manufacturing Overhead)
Indirect labor	$241,600
Factory Rent	$13,600
Utility Expense	$18,000
Depreciation - Factory Equipment	$16,000
Ending Bal.		$13,900

Work In Process Inventory
Beg bal	$5,000	$227,000	Completed and TRFD to Finished Goods Inventory
Direct materials	$129,000
Direct labor	$151,000
Factory Overhead Applied (Refer Note 1)	$317,100
Ending Bal.	$375,100
Finished Goods Inventory
Beg. Bal.	$8,800	$220,000	Cost of Goods sold
Work IN Process	$227,000
Ending Bal.	$15,800

Cost of Goods Sold
Finished Goods Inventory	$220,000
Ending Bal.	$220,000

Note 1 ---

Predetermined Overhead Rate = Estimated Manufacturing Overhead / Estimated Direct labor Costs

Estimated Manufacturing Overhead = $94,500

Estimated Direct labor dollars = $45,000

Predetermined Overhead Rate = Estimated Manufacturing Overhead 94,500 / Estimated Direct labor Costs 45,000 x 100

= 210% of direct labor cost

Calculation of Applied Manufacturing overheads

Actual Direct Labor Costs = $151,000

Predetermined Overhead Rate = 210% of Direct Labor Cost

Applied manufacturing overheads = Actual Direct Labor Cost x Predetermined Overhead rate

= $151,000 x 210%

= $317,100

Part 3A – Over or Under Applied Overhead

Applied Manufacturing Overhead As per Note 1 = $317,100

Actual Manufacturing Overhead = 14000 + 241600 + 13600+18000 + 16000 = 303,200

Here, Applied Manufacturing Overheads are higher than the actual manufacturing overhead, hence the overheads are OVER APPLIED.

Over Applied Manufacturing Overhead = $317,100 – 303,200 = $13,900

Part 3B – Journal Entry

General Journal	Debit	Credit
Manufacturing Overhead	$13,900
Cost of Goods Sold		$13,900

Part 4 – Income Statement

Income Statement
		$$
Sales Revenue		$507,000
Adjusted Cost of Goods Sold (Refer Note 2)		$206,100
Gross Profit (Sales - COGS)		$300,900
Less: Selling and administrative Expenses
Salaries Expense	$71,000
Rent Expenses	$5,000
Advertising Expense	$14,000
Depreciation	$6,000
Total Selling and Administrative Expense		$96,000
Operating Income		$204,900

Note 2 – Adjusted Cost of Goods Sold = Balance in Cost of Goods Sold before over applied overhead $220,000 – Over Applied Manufacturing Overhead $13,900

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