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 $85,000 of manufacturing overhead for an estimated activity level of $50,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows: Raw materials $ 10,400 Work in process $ 4,200 Finished goods $ 8,500 During the year, the following transactions were completed: Raw materials purchased on account, $ 163,000. Raw materials used in production, $143,000 (materials costing $129,000 were charged directly to jobs; the remaining materials were indirect). Costs for employee services were incurred as follows: Direct labor $ 162,000 Indirect labor $ 198,900 Sales commissions $ 21,000 Administrative salaries $ 41,000 Rent for the year was $18,200 ($13,600 of this amount related to factory operations, and the remainder related to selling and administrative activities). Utility costs incurred in the factory, $19,000. Advertising costs incurred, $15,000. Depreciation recorded on equipment, $25,000. ($15,000 of this amount related to equipment used in factory operations; the remaining $10,000 related to equipment used in selling and administrative activities.) Record the manufacturing overhead cost applied to jobs. Goods that had cost $227,000 to manufacture according to their job cost sheets were completed. Sales for the year (all paid in cash) totaled $502,000. The total cost to manufacture these goods according to their job cost sheets was $217,000. 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

	predetermined overhead rate =			85000/50000
				170%
	Accounting titles & Explanations					debit	Credit
a)	Raw materials inventory					163,000
	cash						163,000
b)	work in process inventory					129,000
	Factory overhead					14,000
	Raw materials inventory						143,000
c)	Work in process inventory					162,000
	Factory overhead					198,900
	Sales commission expense					21,000
	Salaries expense					41,000
	cash						422,900
d)	Factory overhead					13,600
	Rent expense					4,600
	cash						18,200
e)	Factory overhead					19,000
	cash						19,000
f)	Advertising expense					15,000
	cash						15,000
g)	Factory overhead					15,000
	Depreciation expense					10,000
	Accumulated depreciation						25,000
h)	work in process inventory					275400
	Factory overhead						275400
i)	finished goods inventory					227,000
	work in process inventory						227,000
j)	Cash					502,000
	Sales revenue						502,000
	cost of goods sold					217,000
	finished goods inventory						217,000
	T-Accounts
	Raw materials				Work in process
Bal	10,400				Bal	4,200
a)	163,000	143,000	b)		b)	129,000	227,000	i)
					c)	162,000
Bal	30,400				h)	275400
					Bal	343,600
					Manufacturing overhead
	Finished goods				beg.bal	0
Bal	8,500				b)	14,000	275400	h)
i)	227,000	217,000			c)	198,900
					d)	13,600
Bal	18,500				e)	19,000
					g)	15,000
							14,900	Bal
	cost of goods sold
Beg.bal	0
j)	217,000
3a)	Manufacturing overhead is over applied
3B)	Journal entry
	Account titles & Explanations					Debit	Credit
	Factory overhead					14,900
	Cost of goods sold						14,900
4)		Income Statement
	Sales						502,000
	less : cost of goods sold						202,100
	Gross margin						299,900
	less:Selling & administrative expense
	Sales comission					21,000
	Administrative salaries					41,000
	Rent exepense					4,600
	Advertising expense					15,000
	Depreciation expense					10,000	91,600
	Net operating income						208,300