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 $342,000 of manufacturing overhead for an estimated allocation base of 950 direct labor-hours. The following transactions took place during the year:

Raw materials purchased on account, $210,000.

Raw materials used in production (all direct materials), $195,000.

Utility bills incurred on account, $61,000 (95% related to factory operations, and the remainder related to selling and administrative activities).

Accrued salary and wage costs:

Direct labor (1,025 hours)	$	240,000
Indirect labor	$	92,000
Selling and administrative salaries	$	120,000

Maintenance costs incurred on account in the factory, $56,000

Advertising costs incurred on account, $138,000.

Depreciation was recorded for the year, $86,000 (75% related to factory equipment, and the remainder related to selling and administrative equipment).

Rental cost incurred on account, $111,000 (80% 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, $790,000.

Sales for the year (all on account) totaled $1,300,000. These goods cost $820,000 according to their job cost sheets.

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

Raw Materials	$	32,000
Work in Process	$	23,000
Finished Goods	$	62,000

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

	Accounting titles & Explanations					Debit	Credit
a)	Raw materials inventory					210,000
	Accounts payable						210,000
b)	work in process inventory					195,000
	Raw materials inventory						195,000
c)	manufacturing overhead					57950
	utility expense					3050
	Accounts payable						61,000
d)	work in process inventory					240,000
	Manufacturing overhead					92,000
	Salary expense					120,000
	Salary & wages payable						452,000
e)	Manufacturing overhead					56,000
	Accounts payable						56,000
f)	Advertising expense					138,000
	Accounts payable						138,000
g)	Manufacturing overhead					64500
	Depreciation expense					21500
	Accumulated depreciation						86,000
h)	Manufacturing overhead					88800
	Rent expense					22200
	Accounts payable						111,000
i)	Work in process inventory					369,000
	Manufacturing overhead						369,000
j)	finished goods inventory					790,000
	Work in process inventory						790,000
k)	Accounts receivable					1,300,000
	sales						1,300,000
	cost of goods sold					820,000
	finished goods inventory						820,000

Accounts receivable					Sales
Beg.bal					Beg.bal
k.	1,300,000						1,300,000	k.
end bal	1,300,000						1,300,000	end bal
Raw Materials					cost of goods sold
Beg.Bal	32,000				Beg.Bal
a.	210,000	195,000	b.		k.	820,000
End bal	47,000				End bal	820,000
Work in process					Manufacturing overhead
Beg Bal	23,000				Beg.Bal
b.	195,000	790,000	j		c.	57950	369,000	i
d.	240,000				d.	92,000
i.	369000				e.	56,000
					g.	64500
end bal	37,000				h.	88800
							9,750	End bal
finished goods					Advertising expense
Beg bal	62,000				Beg.bal
j	790,000	820,000	k		f.	138,000
End bal	32,000				end bal	138,000
Accumulated Depreciation					Utilities expense
beg.bal					Beg bal
g.		86,000	g.		c.	3050
End bal		86,000			end bal	3,050
Accounts payable					Salaries expense
Beg.bal					Beg.Bal
		210,000	a.		d.	120,000
		61,000	c.
		56,000	e.
		138,000	f.
		111,000	h.
End bal		576,000			end bal	155,000
Depreciation expense					Salaries & wages payable
Beg.bal					Beg.bal
g.	21500						452,000	d.
End bal	21,500				end bal		452,000
rent expense
beg bal
h.	22200
End bal	22,200

	Schedule of Cost of Goods Manufactured
Direct Materials:
Beginning raw materials inventory					32,000
Add:purchase of raw materials					210,000
Total raw materials available					242,000
less:Ending raw materials inventory					47,000
Materials used in production						195,000
Direct Labor						240,000
Manufacturing overhead applied to work in process						369000
total manufacturing costs						804,000
Add:Beginning work in process inventory						23,000
						827,000
less:Ending work in process inventory						37,000
Cost of goods manufactured						790,000
Schedule of Cost of goods sold
Beginning finished goods inventory						62,000
Add:Cost of goods manufactured						790,000
Cost of goods available for sale						852,000
less:ending finished goods inventory						32,000
Unadjusted cost of goods sold						820,000
less:overapplied overhead						9,750
Adjusted cost of goods sold						810,250

Income statement
Sales						1,300,000
cost of goods sold						810,250
Gross margin						489,750
Selling and administrative expense
Utilities expense					3050
Advertising expense					138,000
Salaries expense					120,000
Depreciation expense					21,500
rent expense					22200
						304,750
Net operating income						185,000