Question

Eroya Fabrikker A/S of Bergen, Norway, is a small company that manufactures specialty heavy equipment for use in North Sea oil fields. The company uses a job-order costing system that applies manufacturing overhead cost to jobs on the basis of direct labor-hours. Its predetermined overhead rate was based on a cost formula that estimated $360,000 of manufacturing overhead for an estimated allocation base of 900 direct labor-hours. The following transactions took place during the year: a. Raw materials purchased on account, $200,000. b. Raw materials used in production (all direct materials), $185,000. c. Utility bills incurred on account, $70,000 (90% related to factory operations, and the remainder related to selling and administrative activities). d. Accrued salary and wage costs: Direct labor (975 hours) $ 230,000 Indirect labor $ 90,000 Selling and administrative salaries$ 110,000 e. Maintenance costs incurred on account in the factory, S54,000. f. Advertising costs incurred on account, $136,000. 8. Depreciation was recorded for the year, 595,000 (80% related to factory equipment, and the remainder related to selling and administrative equipment). h. Rental cost incurred on account, $120,000 (85% related to factory facilities, and the remainder related to selling and administrative facilities). i. Manufacturing overhead cost was applied to jobs, $ ? j. Cost of goods manufactured for the year, S770,000. k. Sales for the year (all on account) totaled $1,200,000. These goods cost $800,000 according to their job cost sheets. The balances in the inventory accounts at the beginning of the year were: Raw Materials $30,000 Work in Process $21,000 Finished Goods $60,000 Required: 1. Prepare journal entries to record the preceding transactions, 2. Post your entries to T-accounts. (Don't forget to enter the beginning inventory balances above.) 3. Prepare a schedule of cost of goods manufactured. 4A. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold. 4B. Prepare a schedule of cost of goods sold. 5. Prepare an income statement for the year.

Answer 1

Overhead rate =estimated overhead /estimated direct labor hours

                   = 360000/900

                    = $ 400 per DLH

Applied overhead [Actual direct labor hours * overhead rate ] [A]	975*400 = 390000
Actual overhead
Utility cost [70000*90%]	63000
Indirect labor	90000
Maintenance cost	54000
Depreciation factory [95000*80%]	76000
Rent-factory [120000*85%]	102000
Total actual overhead [B]	(385000)
Over-applied overhead [A-B]	5000

5)

FROYA FABRIKKER A/S INCOME STATEMENT FOR THE YEAR ENDED
Sales		1200000
Adjusted cost of goods sold [800000-5000]		(795000)
Gross margin		405000
selling and administrative expense
utilities cost [70000*10%]	7000
Salaries expense	110000
Advertising expense	136000
Depreciation [95000*20%]	19000
Rent [120000*15%]	18000
Total selling and administrative expense		(290000)
Net operating income		115000