Question

Problem 3-16 Comprehensive Problem [LO3-1, LO3-2, LO3-4]

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 $75,000 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	$	11,000
Work in process	$	4,500
Finished goods	$	8,600

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 164,000.
2. Raw materials used in production, $146,000 (materials costing $123,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	153,000
Indirect labor	$	147,000
Sales commissions	$	22,000
Administrative salaries	$	44,000

4. Rent for the year was $18,800 ($13,500 of this amount related to factory operations, and the remainder related to selling and administrative activities).
5. Utility costs incurred in the factory, $15,000.
6. Advertising costs incurred, $11,000.
7. Depreciation recorded on equipment, $22,000. ($17,000 of this amount related to equipment used in factory operations; the remaining $5,000 related to equipment used in selling and administrative activities.)
8. Record the manufacturing overhead cost applied to jobs.
9. Goods that had cost $229,000 to manufacture according to their job cost sheets were completed.
10. Sales for the year (all paid in cash) totaled $514,000. The total cost to manufacture these goods according to their job cost sheets was $219,000.

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

Part 1

No.	Transaction	General journal	Debit	Credit
1	a	Raw materials	164000
		cash		164000
2	b	Work in process	123000
		Manufacturing overhead	23000
		Raw materials		146000
3	c	Work in process	153000
		Manufacturing overhead	147000
		Sales commissions expense	22000
		Administrative salaries	44000
		cash		366000
4	d	Manufacturing overhead	13500
		Rent expense	5300
		Cash		18800
5	e	Manufacturing overhead	15000
		cash		158000
6	f	Advertising expense	11000
		Cash		11000
7	g	Manufacturing overhead	17000
		Depreciation expense	5000
		Accumulated depreciation		22000
8	h	Work in process	229500
		Manufacturing overhead		229500
9	i	Finished goods	229000
		Work in process		229000
10	j	Cash	514000
		Sales		514000
		Cost of goods sold	219000
		Finished goods		219000

Predetermined overhead rate = Estimated manufacturing overhead cost/Estimated total amount of the allocation base = 75000/50000= 150%

Manufacturing overhead applied = direct labor cost * Predetermined overhead rate = 153000*150% = 229500

Part 2

Raw materials

Beg bal.	11000	(b)	146000
(a)	164000
End. Bal.	29000

Work in process

Beg bal.	4500	(i)	229000
(b)	123000
(c)	153000
(h)	229500
End. Bal.	281000

Finished goods

Beg bal.	8600	(j)	219000
(i)	229000
End. Bal.	18600

Manufacturing overhead

(b)	23000	(h)	229500
(c)	147000
(d)	13500
(e)	15000
(g)	17000
End. Bal.	14000

Cost of goods sold

(j)

219000

Part 3 a

Underapplied.

Manufacturing overhead underapplied = actual manufacturing overhead - manufacturing overhead applied

Part 3 b

General Journal	Debit	Credit
Cost of goods sold	14000
Manufacturing overhead		14000

Part 4

Gold Nest Company Income Statement
Sales		514000
Cost of goods sold		233000
Gross profit		281000
Selling and administrative expenses
Sales commissions	22000
Administrative salaries	44000
Rent expense	5300
Advertising expense	11000
Depreciation expense	5000	87300
Net operating income		$193700

Cost of goods sold = 219000+14000= 693000