Question

Mooresville Corporation manufactures reproductions of eighteenth-century, classical-style furniture. It uses a job costing system that applies factory overhead on the basis of direct labor hours. Budgeted factory overhead for the year was $1,261,500, and management budgeted 87,000 direct labor hours. Mooresville had no Materials, Work-in-Process, or Finished Goods Inventory at the beginning of August. These transactions were recorded during August:

 a. Purchased 5,000 square feet of oak on account at $26 per square foot.

 b. Purchased 50 gallons of glue on account at $36 per gallon (indirect material).

 C. Requisitioned 3,500 square feet of oak and 31 gallons of glue for production.

 d. Incurred and paid payroll costs of $187,900. Of this amount, $46,000 were indirect labor costs; direct labor personnel earned $22 per hour.

 e. Paid factory utility bill, $15,230 in cash.

 f. August's insurance cost for the manufacturing property and equipment was $3,500. The premium had been paid in March.

 g. Incurred $8,500 depreciation on manufacturing equipment for August.

 h. Recorded $2,400 depreciation on an administrative asset.

 i. Paid advertising expenses in cash, $5,500.

 j. Incurred and paid other factory overhead costs, $13,500.

 k. Incurred and paid miscellaneous selling and administrative expenses, $13,250.

 I. Applied factory overhead to production on the basis of direct labor hours.

 m. Produced completed goods costing $146,000 during the month.

 n. Sales on account in August were $132,000. The Cost of Goods Sold was $112,000.

 Required:

 1. Compute the firm's predetermined factory overhead rate for the year.

 2. Prepare journal entries to record the August events.

 3. Calculate the amount of overapplied or underapplied overhead to be closed to the Cost of Goods Sold account on August 31.

 4. Prepare a schedule of Cost of Goods Manufactured and Cost of Goods Sold.

 5. Prepare the income statement for August.

Answer 1

1. Predetermined factory overhead rate = Budgeted factory overhead/Budgeted direct labor hours = $1261500/87000 = $14.50 per direct labor hour

2.

Transaction	Account Titles and Explanation	Debit	Credit
a.	Raw Materials Inventory	130000
	Accounts Payable (5000 x $26)		130000
	(To record oak purchased on account)
b.	Raw Materials Inventory	1800
	Accounts Payable (50 x $36)		1800
	(To record glue purchased on account)
c.	Work in process inventory (3500 x $26)	91000
	Manufacturing overhead (31 x $36)	1116
	Raw Materials inventory		92116
	(To record raw materials requisitioned)
d.	Work in process inventory	141900
	Manufacturing overhead	46000
	Cash		187900
	(To record payroll costs incurred and paid)
e.	Manufacturing overhead	15230
	Cash		15230
	(To record factory utility bill paid)
f.	Manufacturing overhead	3500
	Prepaid insurance		3500
	(To record insurance on manufacturing property and equipment)
g.	Manufacturing overhead	8500
	Accumulated depreciation-manufacturing equipment		8500
	(To record depreciation on manufacturing equipment)
h.	Depreciation expense	2400
	Accumulated depreciation-administrative asset		2400
	(To record depreciation on administrative asset)
i.	Advertising expense	5500
	Cash		5500
	(To record advertising expense paid)
j.	Manufacturing overhead	13500
	Cash		13500
	(To record other factory overhead costs paid)
k.	Selling and administrative expense	13250
	Cash		13250
	(To record other selling and administrative expenses paid)
l.	Work in process inventory	93525
	Manufacturing overhead ($141900/$22 x $14.50)		93525
	(To record factory overhead applied)
m.	Finished goods inventory	146000
	Work in process inventory		146000
	(To record goods completed and transferred)
n.(1)	Accounts receivable	132000
	Sales revenue		132000
	(To record sales on account)
n.(2)	Cost of goods sold	112000
	Finished goods inventory		112000
	(To record cost of sales)

3.

Overhead applied $		93525
Overhead incurred:
Indirect materials	1116
Indirect labor	46000
Factory utilities	15230
Factory insurance	3500
Factory depreciation	8500
Other factory overhead costs	13500
Total overhead incurred		87846
Overapplied overhead $		5679

4.

Mooresville Corporation
Schedule of Cost of Goods Manufactured
Direct materials:
Beginning raw materials inventory	0
Add: Purchases of raw materials	131800
Total raw materials available	131800
Less: Ending raw materials inventory	39684
Raw materials used	92116
Less: Indirect raw materials	1116
Direct materials used		91000
Direct labor		141900
Manufacturing overheads		93525
Total manufacturing costs incurred		326425
Add: Beginning work in process inventory		0
Total cost of work in process		326425
Less: Ending work in process inventory		180425
Cost of goods manufactured		146000

Mooresville Corporation
Schedule of Cost of Goods Sold
Cost of goods manufactured	146000
Add: Beginning finished goods inventory	0
Cost of goods available for sale	146000
Less: Ending finished goods inventory	34000
Unadjusted cost of goods sold	112000
Less: Overapplied manufacturing overhead	5679
Adjusted cost of goods sold $	106321

5.

Mooresville Corporation
Income Statement
For the Month Ended August 31
Sales revenue		132000
Cost of goods sold		106321
Gross profit		25679
Less: Operating expenses
Advertising expense	5500
Selling and administrative expense	13250
Depreciation expense	2400
Total operating expenses		21150
Net operating income		4529