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 $349,800 of manufacturing overhead for an estimated allocation base of 1,060 direct labor-hours. The following transactions took place during the year:

Raw materials purchased on account, $230,000.

Raw materials used in production (all direct materials), $215,000.

Utility bills incurred on account, $65,000 (85% related to factory operations, and the remainder related to selling and administrative activities).

Accrued salary and wage costs:

Direct labor (1,135 hours)	$	260,000
Indirect labor	$	96,000
Selling and administrative salaries	$	140,000

Maintenance costs incurred on account in the factory, $60,000

Advertising costs incurred on account, $142,000.

Depreciation was recorded for the year, $90,000 (75% related to factory equipment, and the remainder related to selling and administrative equipment).

Rental cost incurred on account, $115,000 (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, $830,000.

Sales for the year (all on account) totaled $1,500,000. These goods cost $860,000 according to their job cost sheets.

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

Raw Materials	$	36,000
Work in Process	$	27,000
Finished Goods	$	66,000
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

	A	Estimated manufacturing overhead	$349,800
	B	Direct labor hours	1060
	C=A/B	Predetermined overhead rate	$330	($/hour)
		JOURNAL ENTRIE
		Account Title	Debit	Credit
		Raw material inventory	$230,000
		Accounts payable		$230,000
		Workin process	$215,000		(direct materials)
		Raw material inventory		$215,000
		Manufacturing overhead	$55,250		(0.85*65000)(Utilities expense)
		Sales and Administration expenses	$9,750		(0.15*65000)
		Accounts payable		$65,000
		Workin process	$260,000		(direct labor)
		Manufacturing overhead	$96,000		(indirect labor)
		Selling & Administration expenses	$140,000
		Salaries and wages payable		$496,000
		Manufacturing overhead	$60,000		(maintenance expense)
		Accounts payable		$60,000
		Selling & Administration expenses	$142,000
		Accounts payable		$142,000
		Manufacturing overhead	$67,500		(0.75*90000)(Depreciation ,factory)
		Selling & Administration expenses	$22,500		(0.25*90000)(Depreciation ,Selling & administration)
		Accumulated depreciation		$90,000
		Manufacturing overhead	$92,000		(0.8*115000)
		Selling & Administration expenses	$23,000		(0.2*115000)
		Rent payable		$115,000
		Work in process	$374,550		(1135*330)(applied overhead)
		Manufacturing overhead		$374,550
		Finished goods inventory	$830,000		(goods manufactured)
		Work in process		$830,000
		Accounts Receivable	$1,500,000
		Sales		$1,500,000
		Cost of goods sold	$860,000
		Finished goods inventory		$860,000