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 $76,500 of manufacturing overhead for an estimated activity level of $45,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows: Raw materials Work in process Finished goods $10,900 $4,700 $ 8,900 During the year, the following transactions were completed: a. Raw materials purchased on account, $ 163,000. b. Raw materials used in production, $148,000 (materials costing $124,000 were charged directly to jobs; the remaining materials were indirect). c. Costs for employee services were incurred as follows: Direct labor Indirect labor Sales commissions Administrative salaries $ 156,000 $ 179,700 $ 24,000 $ 49,000 d. Rent for the year was $18,800 ($13,700 of this amount related to factory operations, and the remainder related to selling and administrative activities). e. Utility costs incurred in the factory, $19,000. f. Advertising costs incurred, $14,000. g. Depreciation recorded on equipment, $24,000. ($15,000 of this amount related to equipment used in factory operations; the remaining $9,000 related to equipment used in selling and administrative activities.) h. Record the manufacturing overhead cost applied to jobs. i. Goods that had cost $226,000 to manufacture according to their job cost sheets were completed. j. Sales for the year (all paid in cash) totaled $501,000. The total cost to manufacture these goods according to their job cost sheets was $220,000. 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 manufacturing overhead rate = Budgeted manufacturing overhead/Total estimated direct labor cost = $76500/$45000 = 170% of direct labor cost

1.

Transaction	General Journal	Debit	Credit
a.	Raw Materials	163000
	Accounts payable		163000
	(To record raw materials purchased on account)
b.	Work in process	124000
	Manufacturing overheads	24000
	Raw Materials		148000
	(To record raw materials requisitioned)
c.	Work in process	156000
	Manufacturing overheads	179700
	Sales commission expense	24000
	Administrative salaries expense	49000
	Cash		408700
	(To record cost of employee services incurred)
d.	Manufacturing overheads	13700
	Rent expense	5100
	Cash		18800
	(To record rent incurred)
e.	Manufacturing overheads	19000
	Cash		19000
	(To record utilities costs incurred)
f.	Advertising expense	14000
	Cash		14000
	(To record advertising costs incurred)
g.	Manufacturing overheads	15000
	Depreciation expense	9000
	Accumulated depreciation-equipment		24000
	(To record depreciation on equipment)
h.	Work in process	265200
	Manufacturing overheads (170% x $156000)		265200
	(To record manufacturing overhead applied to jobs)
i.	Finished goods	226000
	Work in process		226000
	(To record cost of jobs completed)
j(1)	Cash	501000
	Sales Revenue		501000
	(To record sales on account)
j(2)	Cost of goods sold	220000
	Finished goods		220000
	(To record cost of goods sold)

2.

Raw Materials
Beg. Bal.	10900	148000	b.
a.	163000
End. Bal.	25900
Work in Process
Beg. Bal.	4700	226000	i.
b.	124000
c.	156000
h.	257400
End. Bal.	316100
Finished Goods
Beg. Bal.	8900	220000	j(2)
i.	226000
End. Bal.	14900
Manufacturing Overhead
b.	24000	265200	h.
c.	179700
d.	13700
e.	19000
g.	15000
End. Bal.		13800
Cost of Goods Sold
j(2)	220000
End. Bal.	220000

3-a. Overapplied $13800

Manufacturing overhead incurred $251400 - Manufacturing overhead applied $265200 = Overheads overapplied $13800

3-b.

Event	General Journal	Debit	Credit
1	Manufacturing overhead	13800
	Cost of goods sold		13800
	(To close manufacturing overhead to cost of goods sold)

4.

Gold Nest Company
Income Statement
For the Year Ended
Sales		501000
Cost of goods sold ($220000 - $13800)		206200
Gross profit		294800
Selling and administrative expenses:
Sales commission expense	24000
Advertising expense	14000
Administrative salaries expense	49000
Rent expense	5100
Depreciation expense	9000	101100
Net income		193700