Question

In: Accounting

Gold Nest Company of Guandong, China, is a family-owned enterprise that makes birdcages for the South...

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 $330,000 of manufacturing overhead for an estimated activity level of $200,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials $ 25,000
Work in process $ 10,000
Finished goods $ 40,000

During the year, the following transactions were completed:

  1. Raw materials purchased for cash, $275,000.
  2. Raw materials used in production, $280,000 (materials costing $220,000 were charged directly to jobs; the remaining materials were indirect).
  3. Cash paid to employees as follows:
Direct labor $ 180,000
Indirect labor $ 72,000
Sales commissions $ 63,000
Administrative salaries $ 90,000
  1. Cash paid for rent during the year was $18,000 ($13,000 of this amount related to factory operations, and the remainder related to selling and administrative activities).
  2. Cash paid for utility costs in the factory, $57,000.
  3. Cash paid for advertising, $140,000.
  4. Depreciation recorded on equipment, $100,000. ($88,000 of this amount related to equipment used in factory operations; the remaining $12,000 related to equipment used in selling and administrative activities.)
  5. Manufacturing overhead cost was applied to jobs, $ ? .
  6. Goods that had cost $675,000 to manufacture according to their job cost sheets were completed.
  7. Sales for the year (all paid in cash) totaled $1,250,000. The total cost to manufacture these goods according to their job cost sheets was $700,000.

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.)

Solutions

Expert Solution

predetermined overhead rate = 330,000/200,000
1.65
No. Accounting titles & Explanations debit Credit
a) Raw materials inventory 275,000
cash 275,000
b) work in process inventory 220,000
Factory overhead 60,000
Raw materials inventory 280,000
c) Work in process inventory 180,000
Factory overhead 72,000
Sales commission expense 63,000
Salaries expense 90,000
cash 405,000
d) Factory overhead 13,000
Rent expense 5,000
cash 18,000
e) Factory overhead 57,000
cash 57,000
f) Advertising expense 140,000
cash 140,000
g) Factory overhead 88,000
Depreciation expense 12,000
Accumulated depreciation 100,000
h) work in process inventory 297000
Factory overhead 297000
i) finished goods inventory 675,000
work in process inventory 675,000
j) Cash 1,250,000
Sales revenue 1,250,000
cost of goods sold 700,000
finished goods inventory 700,000
T-Accounts
Raw materials Work in process
Bal 25,000 Bal 10,000
a) 275,000 280,000 b) b) 220,000 675,000 i)
c) 180,000
Bal 20,000 h) 297000
Bal 32,000
Manufacturing overhead
Finished goods beg.bal 0
Bal 40,000 b) 60,000 297000 h)
i) 675,000 700,000 c) 72,000
d) 13,000
Bal 15,000 e) 57,000
g) 88,000
7,000 Bal
cost of goods sold
Beg.bal 0
j) 700,000
3a) Manufacturing overhead is over applied
3B) Journal entry
Account titles & Explanations Debit Credit
Factory overhead 7,000
Cost of goods sold 7,000
4) Income Statement
Sales 1,250,000
less : cost of goods sold 693,000
Gross margin 557,000
less:Selling & administrative expense
Sales comission 63,000
Administrative salaries 90,000
Rent exepense 5,000
Advertising expense 140,000
Depreciation expense 12,000 310,000
Net operating income 247,000

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