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 $399,000 of manufacturing overhead for an estimated allocation base of 1,050 direct labor-hours. The following transactions took place during the year:

Raw materials purchased on account, $280,000.

Raw materials used in production (all direct materials), $265,000.

Utility bills incurred on account, $75,000 (80% related to factory operations, and the remainder related to selling and administrative activities).

Accrued salary and wage costs:

Direct labor (1,100 hours)	$	310,000
Indirect labor	$	106,000
Selling and administrative salaries	$	190,000

Maintenance costs incurred on account in the factory, $70,000

Advertising costs incurred on account, $152,000.

Depreciation was recorded for the year, $88,000 (85% related to factory equipment, and the remainder related to selling and administrative equipment).

Rental cost incurred on account, $113,000 (90% 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, $930,000.

Sales for the year (all on account) totaled $2,000,000. These goods cost $960,000 according to their job cost sheets.

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

Raw Materials	$	46,000
Work in Process	$	37,000
Finished Goods	$	76,000

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.

Froya Fabriker, A/S
General journal for the year
Ref	Account title	Debit	Credit
a	Raw material	280000
	Accounts payable		280000
	(Raw material purchased on account)
b	Work in process	265000
	Raw material		265000
	(Raw material issued for production)
c	Utilities expense	75000
	Accounts payable		75000
	(Utilities expense incurred on account(
	Factory overhead	60000
	Utilities expese		60000
	(Utilities assigned to production)
d	Salaries and wages expenses	606000
	Salaries and wages payable		606000
	(Salaries and wages expenses incurred)
	Work in process	310000
	Factory overhead	106000
	Salaries expense		416000
	(Wages allocated for production)
e	Factory overhead	70000
	Accounts payable		70000
	(Maintenance expense incurred on account)
f	Advertising expense	152000
	Accounts payable		152000
	(Advertising expenses incurred)
g	Depreciation expense	88000
	Accumulated depreciation		88000
	(Depreciation expense for the year recorded)
	Factory overhead	74800
	Depreciation expense		74800
	(Depreciation expense related to factory recorded)
h	Rent expense	113000
	Accounts payable		113000
	(Rental cost incurred for the year recorded)
	Factory overhead	101700
	Rent expense		101700
	(Rental cost related to factory recorded)
i	Work in process	418000
	Factory overhead		418000
	(Factory overhead applied to production)
j	Finished goods	930000
	Work in process		930000
	(Cost of goods manufactued for the year recorded)
k	Accounts receivable	2000000
	Sales revenue		2000000
	(Sale of finished goods recorded)
	Cost of goods sold	960000
	Finished goods		960000
	(Cost of the goods sold recorded)

2.

Raw materials

Work in process

Finished goods

Ref

Debit

Credit

Ref

Ref

Debit

Credit

Ref

Ref

Debit

Credit

Ref

Beg.Bal.

46000

265000

b

Beg.Bal.

37000

930000

j

Beg.Bal.

76000

960000

k

280000

61000

End.Bal.

b

265000

100000

End.Bal.

j

930000

100000

End.Bal.

326000

326000

d

310000

1006000

1060000

Beg.Bal.

61000

i

418000

Beg.Bal.

100000

Factory overhead

1030000

1030000

Accounts receivable

Ref

Debit

Credit

Ref

Beg.Bal.

100000

Ref

Debit

Credit

Ref

c

60000

418000

i

k

2000000

d

106000

Cost of goods sold

e

70000

Ref

Debit

Credit

Ref

g

74800

k

960000

h

101700

960000

0

412500

418000

Advertising expense

Accumulated depreciation

Ref

Debit

Credit

Ref

Ref

Debit

Credit

Ref

Sales revenue

f

152000

88000

g

Ref

Debit

Credit

Ref

2000000

k

152000

0

0

2000000

Utilities expense

Accounts payable

Salaries and wages expense

Ref

Debit

Credit

Ref

Ref

Debit

Credit

Ref

Ref

Debit

Credit

Ref

c

75000

60000

c

75000

c

d

606000

310000

d

70000

e

106000

d

75000

60000

152000

f

End.Bal.

15000

606000

416000

Depreciation expense

Rent expense

Ref

Debit

Credit

Ref

Ref

Debit

Credit

Ref

g

88000

74800

g

h

113000

101700

h

Salaries and wages payable

88000

74800

Ref

Debit

Credit

Ref

113000

101700

606000

d

3.

Schedule of cost of goods manufactured
Beginning raw material inventory	46000
Raw material purchased	280000
Raw material available for use	326000
Ending raw material inventory	61000
Raw material used for production	265000
Direct labor	310000
Factory overhead	418000
Total factory cost incurred	993000
Add: beginning work in process	37000
Toal cost	1030000
Less: ending work in process	100000
Cost of goods manufactured	930000

4.A.

Ref	Account title	Debit	Credit
l	Factory overhead	8900
	Cost of goods sold		8900
	(Overapplied factory overheads transferred to cost of goods sold)

4B.

Schedule of cost of goods sold
Cost of goods manufactured	930000
Add: Beginning balance of finished goods	76000
Finished goods available for sale	1006000
Less: Eding balance of finished goods	46000
Unadjusted cost of goods sold	960000
Adjustment for overapplied overhead	-8900
Adjusted cost of goods sold	951100

5.

Froya Fabriker, A/S
Income statementfor the year
Sales revenue	2000000
Cost of goods sold	951100
Gross profit	1048900
Operating expenses
Selling and administrative salaries	190000
Advertising expenses	152000
Depreciation expense	13200
Rent expense	11300
Utilities expense	15000
Total operating expenses	381500
Net operating income	667400