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 $67,500 of manufacturing overhead for an estimated activity level of $45,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,900
Work in process	$	4,500
Finished goods	$	8,900

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 163,000.
2. Raw materials used in production, $147,000 (materials costing $124,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	159,000
Indirect labor	$	156,800
Sales commissions	$	23,000
Administrative salaries	$	45,000

4. Rent for the year was $18,000 ($13,800 of this amount related to factory operations, and the remainder related to selling and administrative activities).
5. Utility costs incurred in the factory, $13,000.
6. Advertising costs incurred, $10,000.
7. Depreciation recorded on equipment, $24,000. ($17,000 of this amount related to equipment used in factory operations; the remaining $7,000 related to equipment used in selling and administrative activities.)
8. Manufacturing overhead cost was applied to jobs, $ ? .
9. Goods that had cost $230,000 to manufacture according to their job cost sheets were completed.
10. Sales for the year (all paid in cash) totaled $509,000. The total cost to manufacture these goods according to their job cost sheets was $216,000.

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.

Prepare journal entries to record the transactions for the year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations.)

Journal entry worksheet

.....

• Raw materials purchased on account, $163,000.

Note: Enter debits before credits.

1

	Transaction General Journal Debit Credit a.

• Raw materials used in production, $147,000 (materials costing $124,000 were charged directly to jobs; the remaining materials were indirect).

Note: Enter debits before credits.

	Transaction General Journal Debit Credit b.

• Cost for employee services incurred as follows: Direct labor $159,000 Indirect labor $156,800 Sales commissions $23,000 Administrative salaries $45,000

Note: Enter debits before credits.

	Transaction General Journal Debit Credit c.

• Rent for during the year was $18,000 ($13,800 of this amount related to factory operations, and the remainder related to selling and administrative activities).

• Note: Enter debits before credits.

  	Transaction General Journal Debit Credit d.

• 
  

Answer 1

Predetermined overhead rate:

Predetermined overhead rate= Estimated manufacturing overhead/Estimated direct labor cost

=67500/45000

=$1.5 per direct labor cost

Applied manufacturing overhead cost:

Applied manufacturing overhead cost= Actual direct labor cost*predetermined overhead rate

=159000*1.5

=$238500

1. Journal Entries

Event	General journal	Debit	Credit
a	Raw materials	163000
	Cash		163000
	(Raw material purchased)
b	Work in process	124000
	Manufacturing overhead	24000
	Raw materials		147000
	(Raw materials used in production)
c	Work in process	159000
	Manufacturing overhead	156800
	Sales commission expense	23000
	Salaries expense	45000
	Cash		383800
	(Cash paid to employees)
d	Manufacturing overhead	13800
	Rent expense	238500
	Cash		18000
	(Cash paid for rent)
e	Manufacturing overhead	13000
	Cash		13000
	(Cash paid for utility costs)
f	Advertising expense	10000
	Cash		10000
	(Cash paid for advertisement)
g	Manufacturing overhead	17000
	Depreciation expense	7000
	Accumulated Depreciation		24000
	(Depreciation recorded on equipment)
h	Work in process	238500
	Manufacturing overhead		238500
	(Manufacturing overhead applied)
i	Finished goods	230000
	Work in process		230000
	(Goods manufacturing and transferred to finished goods)
j	Cash	509000
	Sales revenue		509000
	(to record sales)
j2	Cost of goods sold	216000
	Finished goods		216000
	(to record cost of goods sold)

2. T-Accounts

Raw material
Debit	Credit
Event	Amount	Event	Amount
Beginning Balance	10900	b	147000
a	163000
Closing balance	26900

Work in process
Debit		Credit
Event	Amount	Event	Amount
Beginning Balance	4500	i	230000
b.	124000
c.	159000
h.	238500
Closing balance	296000

Finished Goods
Debit		Credit
Event	Amount	Event	Amount
Beginning Balance	8900	j2	216000
i.	230000
Closing Balance	22900

Manufacturing overhead
Debit		Credit
Event	Amount	Event	Amount
b.	24000	h.	238500
c.	156800
d.	13800
e.	13000
g.	17000
		Closing balance	13900

3A. manufacturing overhead over-applied or under-applied

Manufacturing overhead cost incurred:	Amount
Indirect Materials	24000
Indirect labor	156800
Factory rent	13800
utility cost	13000
Depreciation on equipment	17000
A. total manufacturing cost incurred	224600
B. Manufacturing overhead applied	238500
c. over-applied /(under-applied)(B-A)	13900

Manufacturing overhead was over-applied from $13900

3B. Journal entry to close any balance in manufacturing overhead

Event	General journal	Debit	Credit
Adjustment	Manufacturing overhead	13900
	Cost of goods sold		13900

4. Income Statement

Revised cost of goods sold balance:

Cost of goods sold=216000

Manufacturing overhead over-applied=(13900)

Revised balance of cost of goods sold=216000-13900=202100

Income statement
Particulars		Amount
Sales		509000
Cost of goods sold		(202100)
Gross profit		306900
Operating expenses:
Sales commission	23000
Administrative salaries	45000
Rent expense(18000-13800)	4200
Advertisement expense	10000
Depreciation expense()	7000
Total operating expense		(89200)
Net income		217700