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 $68,000 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	$	10,500
Work in process	$	4,000
Finished goods	$	8,200

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 168,000.
2. Raw materials used in production, $147,000 (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	$	172,000
Indirect labor	$	202,400
Sales commissions	$	23,000
Administrative salaries	$	42,000

4. Rent for the year was $18,500 ($13,800 of this amount related to factory operations, and the remainder related to selling and administrative activities).
5. Utility costs incurred in the factory, $20,000.
6. Advertising costs incurred, $12,000.
7. Depreciation recorded on equipment, $22,000. ($18,000 of this amount related to equipment used in factory operations; the remaining $4,000 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 $504,000. 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

Predetermined manufacturing overhead rate = Budgeted manufacturing overhead/Total estimated direct labor cost = $68000/$40000 = 170% of direct labor cost

1.

Transaction	General Journal	Debit	Credit
a.	Raw Materials	168000
	Accounts payable		168000
	(To record raw materials purchased on account)
b.	Work in process	123000
	Manufacturing overheads	24000
	Raw Materials		147000
	(To record raw materials requisitioned)
c.	Work in process	172000
	Manufacturing overheads	202400
	Sales commission expense	23000
	Administrative salaries expense	42000
	Cash		439400
	(To record cost of employee services incurred)
d.	Manufacturing overheads	13800
	Rent expense	4700
	Cash		18500
	(To record rent incurred)
e.	Manufacturing overheads	20000
	Cash		20000
	(To record utilities costs incurred)
f.	Advertising expense	12000
	Cash		12000
	(To record advertising costs incurred)
g.	Manufacturing overheads	18000
	Depreciation expense	4000
	Accumulated depreciation-equipment		22000
	(To record depreciation on equipment)
h.	Work in process	292400
	Manufacturing overheads (170% x $172000)		292400
	(To record manufacturing overhead applied to jobs)
i.	Finished goods	229000
	Work in process		229000
	(To record cost of jobs completed)
j(1)	Cash	504000
	Sales Revenue		504000
	(To record sales on account)
j(2)	Cost of goods sold	219000
	Finished goods		219000
	(To record cost of goods sold)

2.

Raw Materials
Beg. Bal.	10500	123000	b.
a.	168000	24000	b.
End. Bal.	31500
Work in Process
Beg. Bal.	4000	229000	i.
b.	123000
c.	172000
h.	292400
End. Bal.	362400
Finished Goods
Beg. Bal.	8200	219000	j(2)
i.	229000
End. Bal.	18200
Manufacturing Overhead
b.	24000	292400	h.
c.	202400
d.	13800
e.	20000
g.	18000
End. Bal.		14200
Cost of Goods Sold
j(2)	219000
End. Bal.	219000

3-a. Overapplied

Manufacturing overhead incurred $278200 - Manufacturing overhead applied $292400 = Overheads overapplied $14200

3-b.

Event	General Journal	Debit	Credit
1	Manufacturing overhead	14200
	Cost of goods sold		14200
	(To close manufacturing overhead to cost of goods sold)

4.

Gold Nest Company
Income Statement
For the Year Ended
Sales		504000
Cost of goods sold ($219000 - $14200)		204800
Gross margin		299200
Selling and administrative expenses:
Rent expense	4700
Advertising expense	12000
Sales commissions	23000
Administrative salaries expense	42000
Depreciation expense	4000
		85700
Net income		213500