Question

Christopher’s Custom Cabinet Company uses a job order cost system with overhead applied as a percentage of direct labor costs. Inventory balances at the beginning of 2016 follow:

Raw Materials Inventory	$	15,700
Work in Process Inventory		6,700
Finished Goods Inventory		21,300

The following transactions occurred during January:
(a) Purchased materials on account for $26,800.
(b) Issued materials to production totaling $21,000, 90 percent of which was traced to specific jobs and the remainder of which was treated as indirect materials.
(c) Payroll costs totaling $18,400 were recorded as follows:
    $10,100 for assembly workers
     2,500 for factory supervision
     2,700 for administrative personnel
      3,100 for sales commissions
(d) Recorded depreciation: $5,000 for machines, $1,100 for the copier used in the administrative office.
(e) Recorded $1,800 of expired insurance. Forty percent was insurance on the manufacturing facility, with the remainder classified as an administrative expense.
(f) Paid $5,600 in other factory costs in cash.
(g) Applied manufacturing overhead at a rate of 200 percent of direct labor cost.
(h) Completed all jobs but one; the job cost sheet for this job shows $2,200 for direct materials, $2,100 for direct labor, and $4,200 for applied overhead.
(i) Sold jobs costing $50,200. The revenue earned on these jobs was $65,260.

Required:
1. Set up T-accounts, record the beginning balances, post the January transactions, and compute the final balance for the following accounts: (Post all amounts separately. Do not combine/add any dollar amounts when posting to the t-accounts.)

1. Raw Materials Inventory.
2. Work in Process Inventory.
3. Finished Goods Inventory.
4. Cost of Goods Sold.
5. Selling, General, and Administrative Expenses.
6. Sales Revenue.
7. Other accounts (Cash, Payables, etc.).

2. Determine how much gross profit the company would report during the month of January before any adjustment is made for the overhead balance.



3. Determine the amount of over- or underapplied overhead.



4. Compute adjusted gross profit assuming that any over- or underapplied overhead balance is adjusted directly to Cost of Goods Sold.

Answer 1

1. a. Raw Materials Inventory:

Date / Transaction	Debit	Credit	Balance
Jan 1			15,700
a.	26,800
b.		21,000
Jan 31			21,500

b. Work in Process Inventory:

Date / Transaction	Debit	Credit	Balance
Jan 1	6,700
b.	18,900
c.	10,100
g.	20,200
h.		47,400
Jan 31			8,500

c. Finished Goods Inventory:

Date / Transaction	Debit	Credit	Balance
Jan 1			21,300
h.	47,400
i.		50,200
Jan 31			18,500

d.Cost of Goods Sold:

Transaction	Debit	Credit	Balance
i.	50,200

e.Selling, General and Administrative Expenses:

Transaction	Debit	Credit	Balance
c.	5,800
d.	1,100
e.	1,080
Jan 31			7,980

g. Sales Revenue:

Transaction	Debit	Credit	Balance
i.		65,260
Jan 31			65,260

2. Gross Profit = Sales Revenue - Cost of Goods Sold = $ 65,260 - $ 50,200 = $ 15,060.

3. Manufacturing overhead incurred : $ 15,920

Manufacturing overhead applied : $ 20,200

Manufacturing over-applied = $ 20,200 - $ 15,920 = $ 4,280

Manufacturing Overhead:

b.	2,100
c.	2,500
d.	5,000
e.	720
f.	5,600
g.		20,200
	$ 15,920	$ 20,200

4. Adjusted cost of goods sold = $ 50,200 - $ 4,280 = $ 45,920

Adjusted gross profit = $ 65,260 - $ 45,920 = $ 19,340.