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 $92,000 of manufacturing overhead for an estimated activity level of $40,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,400
Work in process	$	4,500
Finished goods	$	8,300

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 165,000.
2. Raw materials used in production, $147,000 (materials costing $130,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	157,000
Indirect labor	$	287,600
Sales commissions	$	29,000
Administrative salaries	$	48,000

4. Rent for the year was $18,200 ($13,400 of this amount related to factory operations, and the remainder related to selling and administrative activities).
5. Utility costs incurred in the factory, $13,000.
6. Advertising costs incurred, $13,000.
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 $225,000 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

1)	Journal Entries
	Event No	Particulars				Debit	Credit
	1)	Raw Materials				$ 165,000.00
		To Cash					$ 165,000.00
	2)	WIP				$ 130,000.00
		Factory OH				$   17,000.00
		To Raw Materials					$ 147,000.00
	3)	WIP				$ 157,000.00
		Factory OH				$ 287,600.00
		To Factory Payroll					$ 444,600.00
		(Direct and Indirect Labor charges)
	4)	Selling Commissions				$   29,000.00
		To Cash					$   29,000.00
	5)	Salaries Expense				$   48,000.00
		To Cash					$   48,000.00
	6)	Factory OH				$   13,400.00
		Rent Expense				$     4,800.00
		To Cash					$   18,200.00
	7)	Factory OH				$   13,000.00
		To Cash					$   13,000.00
	8)	Advertising Expense				$   13,000.00
		To Cash					$   13,000.00
	9)	Factory OH				$   17,000.00
		Depreciation Expense				$     5,000.00
		To Accumulated Depreciation					$   22,000.00
	10)	WIP				$ 361,100.00
		To Factory OH					$ 361,100.00
		(W.N)
	11)	Finished Goods				$ 225,000.00
		To WIP					$ 225,000.00
	12)	Cash				$ 514,000.00
		To Sales					$ 514,000.00
		Cost of Goods sold				$ 219,000.00
		To Finished Goods					$ 219,000.00

W.N
Predetermined OH rate =			Estimated Manu. OH Cost / Estimated Direct Labor Cost
		=	$ 92000 / $ 40000
		=	2.3	times
OH applied		=	Actual Direct Labor cost x 2.3
		=	$ 157000 x 2.3
		=	$ 361,100.00

2)	Raw Materials
	Beg. Bal.	$   10,400.00	2)	$ 147,000.00
	1)	$ 165,000.00	End. Bal.	$   28,400.00
	WIP
	Beg. Bal.	$     4,500.00	11)	$ 225,000.00
	2)	$ 130,000.00
	3)	$ 157,000.00
	10)	$ 361,100.00	End. Bal.	$ 427,600.00
	Finished Goods
	Beg. Bal.	$     8,300.00	12)	$ 219,000.00
	11)	$ 225,000.00	End. Bal.	$   14,300.00
	Manufacturing OH
	2)	$   17,000.00	10)	$ 361,100.00
	3)	$ 287,600.00
	6)	$   13,400.00
	7)	$   13,000.00
	9)	$   17,000.00
	3B)	$   13,100.00
	Cost of Goods sold
	12)	$ 219,000.00	3B)	$   13,100.00
			P/L	$ 205,900.00

3A)	Actual Manu. OH =		$ 348,000.00
	Applied Manu. OH =		$ 361,100.00
	Overapplied =		$   13,100.00
3B)	Manufacturing OH		$   13,100.00
	To Cost of Goods sold			$ 13,100.00

4)	Income Statement
	Sales			$   514,000.00
Less:	Cost of Goods sold			$ (205,900.00)
	Gross Margin			$   308,100.00
Less:	Expenses:
	Selling Commissions			$   (29,000.00)
	Salaries Expense			$   (48,000.00)
	Rent Expense			$      (4,800.00)
	Advertising Expense			$   (13,000.00)
	Depreciation Expense			$      (5,000.00)
	Net Income			$   208,300.00