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 $76,000 of manufacturing overhead for an estimated activity level of $40,000 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	$	8,700

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 165,000.
2. Raw materials used in production, $140,000 (materials costing $122,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	154,000
Indirect labor	$	219,900
Sales commissions	$	26,000
Administrative salaries	$	47,000

4. Rent for the year was $19,000 ($13,100 of this amount related to factory operations, and the remainder related to selling and administrative activities).
5. Utility costs incurred in the factory, $11,000.
6. Advertising costs incurred, $13,000.
7. Depreciation recorded on equipment, $21,000. ($16,000 of this amount related to equipment used in factory operations; the remaining $5,000 related to equipment used in selling and administrative activities.)
8. Manufacturing overhead cost was applied to jobs, $ ? .
9. Goods that had cost $227,000 to manufacture according to their job cost sheets were completed.
10. Sales for the year (all paid in cash) totaled $515,000. The total cost to manufacture these goods according to their job cost sheets was $217,000.

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

Account title & explanation Raw Material inventory Debit Credit 35 165,000 36 a Cash 165,000 37 38 Work in Process Inventory Manufacturing Overhead Raw Material inventory 122,000 18,000 39 b 40 140,000 41 42 Work in Process Inventory Manufacturing Overhead 154,000 219,900 26,000 47,000 43 C 44 Sales Commission 45 Adminstrative salaries 46 Cash 446,900 47 48. Manufacturing Overhead Rent Expense 13,100 49 d 5,900 50 Cash 19,000 51 52 Manufacturing Overhead 11,000 53 e Cash 11,000 54 55 Advertising expense 13,000 56 f Cash 13,000 57

Manufacturing Overhead Depreciation expense Accumulated depreciation 59 g 16,000 5,000 60 21,000 61 62 Work in Process Inventory Manufacturing Overhead applied 292,600 63 h 76000 292,600 64 40000 65 1.9 Finished goods inventory Work in Process Inventory 227,000 66 i 227,000 67 68 Cash 515,000 69 j 515,000 Sales 70 71 Cost of goods sold Finished goods inventory 217,000 72 217,000 73 74 75 Prepare t-accounts for inventories, Manufacturing Overhead, and Cost of Goods Sold. 76 77 Raw material inventory A/C 10,900 165,000 35,900 78 140,000 79 80 81

Work In process inventory A/C 4,500 122,000 154,000 292,600 84 227,000 85 86 87 88 89 346,100 90 91 92 Manufacturing Overhead A/C 18,000 219,900 13,100 11,000 16,000 93 292,600 94 95 96 97 98 99 14,600 Overapplied 100 101 102 Finished goods Inventory A/C 217,000 103 8,700 227,000 104 105 106 18,700 107

Cost of goods sold A/C 217,000 202,400 110 14,600 111 112 113 114 Sales revenue A/C 115 515,000 116 117 515,000 18| 119 120 Is Manufacturing Overhead underapplied or overapplied for the year? 121 Amount $ Particulars 122 Actual overheads 278,000 292,600 14,600 123 Applied Overheads Overapplied Overheads 124 125 126 127 128 Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold. 129 Account title & explanation Debit Credit 130 131 Manufacturing Overheads Cost of goods Sold 14,600 132 14,600 133

135 Prepare an Income Statement 136 Income Statement 137 Details $ Particulars Amount $ 138 139 Sales 515,000 202,400 312,600 140 less cost of Goods sold 141 Gross Profit 142 less selling & adminstrative Expenses 143 Sales Commission 26,000 47,000 144 Adminstrative salaries 145 Rent Expense Advertising expense Depreciation expense Net Income 5,900 13,000 5,000 146 147 96,900 215,700 148 149 150 151