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 $380,000 of manufacturing overhead for an estimated allocation base of 1,000 direct labor-hours. The following transactions took place during the year:

Raw materials purchased on account, $220,000.

Raw materials used in production (all direct materials), $205,000.

Utility bills incurred on account, $63,000 (90% related to factory operations, and the remainder related to selling and administrative activities).

Accrued salary and wage costs:

Direct labor (1,075 hours)	$	250,000
Indirect labor	$	94,000
Selling and administrative salaries	$	130,000

Maintenance costs incurred on account in the factory, $58,000

Advertising costs incurred on account, $140,000.

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, $810,000.

Sales for the year (all on account) totaled $1,400,000. These goods cost $840,000 according to their job cost sheets.

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

Raw Materials	$	34,000
Work in Process	$	25,000
Finished Goods	$	64,000

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.

Transaction	General Journal	Debit	Credit
a.	Raw materials inventory	220000
	Accounts payable		220000
	(To record raw materials purchased on account)
b.	Work in process inventory	205000
	Raw materials inventory		205000
	(To record materials requisitioned)
c.	Manufacturing overhead (90% x $63000)	56700
	Utility expense (10% x $63000)	6300
	Accounts payable		63000
	(To record utility bills incurred)
d.	Work in process inventory	250000
	Manufacturing overhead	94000
	Salaries expense	130000
	Salaries and wages payable		474000
	(To record payment of factory wages)
e.	Manufacturing overhead	58000
	Accounts payable		58000
	(To record maintenance costs incurred)
f.	Advertising expense	140000
	Accounts payable		140000
	(To record advertising costs incurred)
g.	Manufacturing overhead (85% x $88000)	74800
	Depreciation expense (15% x $88000)	13200
	Accumulated depreciation		88000
	(To record depreciation for the year)
h.	Manufacturing overhead (90% x $113000)	101700
	Rent expense (10% x $113000)	11300
	Accounts payable		113000
	(To record rental cost incurred)
i.	Work in process inventory (1075 x $380)*	408500
	Manufacturing overhead		408500
	(To record manufacturing overheads applied)
j.	Finished goods inventory	810000
	Work in process inventory		810000
	(To record jobs transferred to finished goods)
k(1)	Accounts receivable	1400000
	Sales revenue		1400000
	(To record jobs sold on credit)
k(2)	Cost of goods sold	840000
	Finished goods inventory		840000
	(To record cost of sales)

*Predetermined overhead rate = Estimated manufacturing overhead/Estimated direct labor hours = $380000/1000 = $380 per direct labor hour

2.

Raw Materials					Work in Process
	Debit	Credit				Debit	Credit
Beg. Bal.	34000				Beg. Bal.	25000
a.	220000	205000	b.		b.	205000	810000	j.
End. Bal.	49000				d.	250000
					i.	408500
					End. Bal.	78500
Finished Goods					Manufacturing Overhead
	Debit	Credit				Debit	Credit
Beg. Bal.	64000				Beg. Bal.	0
j.	810000	840000	k(2)		c.	56700	408500	i.
					d.	94000
End. Bal.	34000				e.	58000
					g.	74800
					h.	101700
					End. Bal.		23300
Sales Revenue					Cost of Goods Sold (COGS)
	Debit	Credit				Debit	Credit
		1400000	k(1)		k(2)	840000
End. Bal.		1400000			End. Bal.	840000
Rent Expense					Utilities Expense
	Debit	Credit				Debit	Credit
h.	11300				c.	6300
End. Bal.	11300				End. Bal.	6300
Accounts Payable					Accounts Receivable
	Debit	Credit				Debit	Credit
		220000	a.		k(1)	1400000
		63000	c.
		58000	e.
		140000	f.
		113000	h.
End. Bal.		594000			End. Bal.	1400000
Salaries Expense					Salaries Payable
	Debit	Credit				Debit	Credit
d.	130000						474000	d.
End. Bal.	130000				End. Bal.		474000
Advertising Expense					Depreciation Expense
	Debit	Credit				Debit	Credit
f.	140000				g.	13200
End. Bal.	147000				End. Bal.	13200
Accumulated Depreciation
	Debit	Credit
		88000	g.
End. Bal.		88000

3.

Froya Fabrikker A/S
Schedule of Cost of Goods Manufactured
Direct materials:
Beginning raw materials inventory	34000
Add: Purchase of raw materials	220000
Total raw materials available	254000
Less: Ending raw materials inventory	49000
Materials used in production		205000
Direct labor		250000
Manufacturing overheads		408500
Total manufacturing costs incurred		863500
Add: Beginning work in process inventory		25000
Total cost of work in process inventory		888500
Less: Ending work in process inventory		78500
Cost of goods manufactured $		810000

4A.

Transaction	General Journal	Debit	Credit
1	Manufacturing overhead	23300
	Cost of goods sold		23300
	(To close overapplied overheads to cost of goods sold)

4B.

Froya Fabrikker A/S
Schedule of Cost of Goods Sold
Cost of goods manufactured	810000
Add: Beginning finished goods inventory	64000
Cost of goods available for sale	874000
Less: Ending finished goods inventory	34000
Cost of goods sold $	840000
Less: Manufacturing overheads overapplied	23300
Adjusted cost of goods sold $	816700

5.

Froya Fabrikker A/S
Income Statement
For the Year Ended
Sales revenue		1400000
Cost of goods sold		816700
Gross profit		583300
Selling and administrative expenses:
Utilities expense	6300
Salaries expense	130000
Advertising expense	140000
Depreciation expense	13200
Rent expense	11300	300800
Net operating income $		282500