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 $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

4. 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).
5. Cash paid for utility costs in the factory, $57,000.
6. Cash paid for advertising, $140,000.
7. 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.)
8. Manufacturing overhead cost was applied to jobs, $ ? .
9. Goods that had cost $675,000 to manufacture according to their job cost sheets were completed.
10. 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.)

Answer 1

	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