Question

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 $103,500 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 $ 10,000 Work in process $ 4,200 Finished goods $ 8,100 During the year, the following transactions were completed: Raw materials purchased for cash, $ 168,000. Raw materials used in production, $145,000 (materials costing $124,000 were charged directly to jobs; the remaining materials were indirect). Cash paid to employees as follows: Direct labor $ 175,000 Indirect labor $ 324,900 Sales commissions $ 20,000 Administrative salaries $ 40,000 Cash paid for rent during the year was $18,800 ($13,300 of this amount related to factory operations, and the remainder related to selling and administrative activities). Cash paid for utility costs in the factory, $15,000. Cash paid for advertising, $11,000. Depreciation recorded on equipment, $21,000. ($15,000 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 $228,000 to manufacture according to their job cost sheets were completed. Sales for the year (all paid in cash) totaled $505,000. 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

Answer 1.
Journal Entry
Date	Particulars	Dr. Amt.	Cr. Amt.
a.	Raw Materials	168,000.00
	Cash		168,000.00
	(record the purchase of raw material)
b.	Work in Process	124,000.00
	Manufacturing Overhead	21,000.00
	Raw Materials		145,000.00
	(record the raw materials used in production)
c.	Work in Process	175,000.00
	Manufacturing Overhead	324,900.00
	Sales Commission Expense	20,000.00
	Salaries Expense - Administrative	40,000.00
	Cash		549,900.00
	(record the expense)
d.	Manufacturing Overhead	13,300.00
	Rent Expense	5,500.00
	Cash		18,800.00
	(record the rent expense)
e.	Manufacturing Overhead	15,000.00
	Cash		15,000.00
	(record the utilities expense incurred )
f.	Advertising Expense	11,000.00
	Cash		11,000.00
	(record the advertising expense)
g.	Manufacturing Overhead	15,000.00
	Depreciation Expense	6,000.00
	Accumulated Depreciation		21,000.00
	(record the dep expense on factory equip)
h.	Work in Process	402,500.00		$2.30 X $175,000 (DL)
	Manufacturing Overhead		402,500.00	$2.30 X $175,000 (DL)
	(record the manufacturing overhead applied)
	Predetermined Overhead Rate = $103,500 (estimated overhead) / $45,000 Direct Labor
	Predetermined Overhead Rate = $2.30 per Direct Labor $
i.	Finished Goods Inventory	228,000.00
	Work In Process		228,000.00
	(record the finished goods produced)
j-1	Cash	505,000.00
	Sales		505,000.00
	(record the sales made on credit)
j-2.	Cost of Goods Sold	220,000.00
	Finished Goods Inventory		220,000.00
	(record the cost of goods sold)
3-B	Manufacturing Overhead	13,300.00
	Cost of Goods Sold		13,300.00
	(record the Overapplied manufacturing overhead)

Answer 2.
Raw Materials					Work in Process					Manufacturing Overhead
Beg. Bal.	10,000.00	145,000.00	b.		Beg. Bal.	4,200.00	228,000.00	i.		Beg. Bal.	-	402,500.00	h.
a.	168,000.00				b.	124,000.00				b.	21,000.00
					c.	175,000.00				c.	324,900.00
					h.	402,500.00				d.	13,300.00
End. Bal.	33,000.00									e.	15,000.00
										g.	15,000.00
										Overapplied	13,300.00
					End. Bal.	477,700.00				End. Bal.	-
Finished Goods					Cost of Goods Sold						402,500.00
Beg. Bal.	8,100.00	220,000.00	j-2.		Beg. Bal.	-	13,300.00	Overapplied
i.	228,000.00				j-2.	220,000.00
End. Bal.	16,100.00				End. Bal.	206,700.00
Answer 3-a.
Applied Overhead		402,500.00
Actual Overhead		389,200.00
Overeapplied Overhead		13,300.00

Answer 4.
Income Statement
Sales Revenue		505,000.00
Adjusted Cost of Goods Sold		206,700.00
Gross Margin		298,300.00
Less: Selling & Administration Expenses
Sales Commission	20,000.00
Administrative Salaries	40,000.00
Rent Expenses	5,500.00
Advertising Expense	11,000.00
Depreciation Expense	6,000.00	82,500.00
Net Operating Income		215,800.00