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 $95,000 of manufacturing overhead for an estimated activity level of $50,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,900
Work in process	$	4,200
Finished goods	$	8,400

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 163,000.
2. Raw materials used in production, $150,000 (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	$	163,000
Indirect labor	$	225,600
Sales commissions	$	26,000
Administrative salaries	$	41,000

4. Rent for the year was $18,700 ($13,600 of this amount related to factory operations, and the remainder related to selling and administrative activities).
5. Utility costs incurred in the factory, $14,000.
6. Advertising costs incurred, $11,000.
7. Depreciation recorded on equipment, $22,000. ($16,000 of this amount related to equipment used in factory operations; the remaining $6,000 related to equipment used in selling and administrative activities.)
8. Record the manufacturing overhead cost 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 $499,000. 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.

Answer 1

	predetermined overhead rate =			95000/50,000
				190%
	Accounting titles & Explanations					debit	Credit
a)	Raw materials inventory					163,000
	Accounts payable						163,000
b)	work in process inventory					124,000
	Factory overhead					26,000
	Raw materials inventory						150,000
c)	Work in process inventory					163,000
	Factory overhead					225,600
	Sales commission expense					26,000
	Salaries expense					41,000
	cash						455,600
d)	Factory overhead					13,600
	Rent expense					5,100
	cash						18,700
e)	Factory overhead					14,000
	cash						14,000
f)	Advertising expense					11,000
	cash						11,000
g)	Factory overhead					16,000
	Depreciation expense					6,000
	Accumulated depreciation						22,000
h)	work in process inventory					309700
	Factory overhead		(163000*190%)				309700
i)	finished goods inventory					227,000
	work in process inventory						227,000
j)	Cash					499,000
	Sales revenue						499,000
	cost of goods sold					216,000
	finished goods inventory						216,000
	T-Accounts
	Raw materials				Work in process
Bal	10,900				Bal	4,200
a)	163,000	150,000	b)		b)	124,000	227,000	i)
					c)	163,000
Bal	23,900				h)	309700
					Bal	373,900
					Manufacturing overhead
	Finished goods				beg.bal	0
Bal	8,400				b)	26,000	309700	h)
i)	227,000	216,000			c)	225,600
					d)	13,600
Bal	19,400				e)	14,000
					g)	16,000
							14,500	Bal
	cost of goods sold
Beg.bal	0
j)	216,000
3a)	Manufacturing overhead is over applied
3B)	Journal entry
	Account titles & Explanations					Debit	Credit
	Factory overhead					14,500
	Cost of goods sold						14,500
4)		Income Statement
	Sales						499,000
	less : cost of goods sold						201,500
	Gross margin						297,500
	less:Selling & administrative expense
	Sales comission					26,000
	Administrative salaries					41,000
	Rent exepense					5,100
	Advertising expense					11,000
	Depreciation expense					6,000	89,100
	Net operating income						208,400