Question

On January 1, 2020, John Smith launched a computer services company, Technology Business Solutions that is organized as a corporation and provides computer consulting services and computer system installations. Smith adopts the calendar year for reporting purposes. After the initial success of the company, John Smith continues to operate Technology Business Solutions and has expanded into computer systems manufacturing and sales. They are currently contracting with several large businesses to develop and construct their IT systems. They are several months into the planning and production of these systems and the information for the current month is as follows: Beginning balance Ending balance Raw materials Work in process Finished goods $19.000 $32,000 $46,500 $8,000 $55,950 $54,275 The company applies overhead to jobs using a predetermined overhead rate based on direct labor hours. At the beginning of the year, the company estimated that it would work 15,000 direct labor hours and incur $315,000 in manufacturing overhead cost. The following transactions were recorded for the current month: 1. Raw materials were purchased on account in the amount of $78,000. 2. Raw materials requisitioned for use in production totaled $89,000 ($68,000 direct and $21,000 indirect). 3. The following employee costs were incurred: direct labor was $77,000; indirect labor was $12,000, and executive salaries were $24,000. 4. Selling costs, consisting of commissions for a contracted sales staff and advertising, were incurred in the amount of $48,000. 5. Utility costs were incurred in the amount of $15,000, $9,500 of which was for the factory and the rest for the administrative offices. 6. Depreciation for the month was $28,000 of which $22,000 is related to factory operations and the rest is related to selling and administrative activities. 7. Manufacturing overhead was applied to jobs. The actual level of activity for this month was 2,825 direct labor hours. 8. Sales for the month on account totaled $343,000. Required: a. Identify one example of the following cost classifications for this company: 1. Direct Material 2. Direct Labor 3. Indirect Material

Answer 1

Required a:-

1. Direct material = motherboard, keyboard purchase etc.

2.Direct labour= wages paid to worker engaged in assembling parts

3.Indirect material = material used in maintenance of plant and machinery

4. Indirect labor = wages paid to inspector,store keeper

5. Manufacturing overhead = all factory expenses like rent , repair, insurance,rates , taxes etc.

Required b:-

No.	Account title	Debit	Credit
1	raw material inventory	$78000
	To account payable		$78000
2	work in process inventory	$68000
	Manufacturing overhead	$21000
	To raw material inventory		$89000
3	work in process inventory	$77000
	Manufacturing overhead	$12000
	Salaries expenses	$24000
	To salaries and wages payable		$113000
4	sales commission	$48000
	To salaries and wages payable		$48000
5	manufacturing overhead	$9500
	Administrative and office expense ($15000-$9500)	$5500
	To Account payable		$15000
6	Manufacturing overhead	$22000
	Depreciation expenses ($28000-$22000)	$6000
	To accumulated depreciation		$28000
7	work in process inventory ($315000/$15000)*$2825	$59325
	To manufacturing overhead		$59325
8	Accounts receivable	$343000
	To sales		$343000
9	Finished goods inventory	$180375
	To work in process inventory		$180375

Required d :-

Schedule of cost of goods manufactured

Direct material :-
Beginning raw material inventory	$19000
Add:- purchase of raw material	$78000
Total raw material available	$97000
Less:- ending raw material inventory	$8000
Raw material used in production	$89000
Less:- indirect material used	$21000	$68000
Direct labor		$77000
Manufacturing overhead applied to work in process		$59325
Total manufacturing cost		$204325
Add:- Beginning work in process inventory		$32000
		$236325
Less:- Ending work in process inventory		$55950
Cost of goods manufactured		$180375

Required e:-

Manufacturing overhead

$21000	$59325
$12000
$9500
$22000
$5175

Since, there is debit balance in manufacturing overhead account,it is under applied overhead of $5175

Journal entry to close it

Cost of goods sold	$5175
To manufacturing overhead		$5175