Question

Christopher’s Custom Cabinet Company uses a job order cost system with overhead applied as a percentage of direct labor costs. Inventory balances at the beginning of 2018 follow:

Raw Materials Inventory	$	15,600
Work in Process Inventory		6,600
Finished Goods Inventory		22,000

The following transactions occurred during January:

(a) Purchased materials on account for $27,500.
(b) Issued materials to production totaling $21,900, 90 percent of which was traced to specific jobs and the remainder of which was treated as indirect materials.
(c) Payroll costs totaling $18,700 were recorded as follows:
    $11,800 for assembly workers
     2,100 for factory supervision
     2,700 for administrative personnel
      2,100 for sales commissions
(d) Recorded depreciation: $5,800 for factory machines, $1,400 for the copier used in the administrative office.
(e) Recorded $1,300 of expired insurance. Forty percent was insurance on the manufacturing facility, with the remainder classified as an administrative expense.
(f) Paid $6,200 in other factory costs in cash.
(g) Applied manufacturing overhead at a rate of 200 percent of direct labor cost.
(h) Completed all jobs but one; the job cost sheet for the uncompleted job shows $2,500 for direct materials, $2,100 for direct labor, and $4,200 for applied overhead.
(i) Sold jobs costing $51,900. The revenue earned on these jobs was $67,470.

Required:
1. Set up T-accounts, record the beginning balances, post the January transactions, and compute the final balance for the following accounts:

1. Raw Materials Inventory.
2. Work in Process Inventory.
3. Finished Goods Inventory.
4. Cost of Goods Sold.
5. Manufacturing Overhead.
6. Selling, General, and Administrative Expenses.
7. Sales Revenue.

2. Determine how much gross profit the company would report during the month of January before any adjustment is made for the overhead balance.

3. Determine the amount of over- or underapplied overhead.

4. Compute adjusted gross profit assuming that any over- or underapplied overhead balance is adjusted directly to Cost of Goods Sold.

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Answer 1

1. Set up T-accounts, record the beginning balances, post the January transactions, and compute the final balance as follows:

Raw materials inventory
Beg. Bal	15600
(a)	27500	21900	(b)
End. Bal	21200
Work in Process Inventory
Beg. Bal	6600
(b)	19710	53430	(h)
(c)	11800
(e)	520
(g)	23600
End. Bal	8800
Finished Goods Inventory
Beg. Bal	22000
(h)	53430	51900	(i)
End. Bal	23530
Cost of Goods Sold
Beg. Bal
(i)	51900
End. Bal	51900
Manufacturing Overhead
Beg. Bal
(b)	2190	23600	(g)
(c)	2100
(d)	5800
(f)	6200
End. Bal		7310
Selling, General, and Administrative Expenses
Beg. Bal
(c)	2700
(c)	2100
(d)	1400
(e)	780
End. Bal	6980
Sales Revenue
Beg. Bal
		67470	(i)
End. Bal		67470

2. Determine how much gross profit the company would report during the month of January before any adjustment is made for the overhead balance as follows:

Sales revenue = $67,470

Cost of goods sold = $51,900

Therefore,

Gross profit = $67,470 - $51,900 = $15,570

3. Determine the amount of over- or underapplied overhead as follows:

The manufacturing overhead account has a credit ending balance. That means overhead has been overapplied.

Therefore,

Overapplied overhead = $7,310

4. Compute adjusted gross profit assuming that any over- or underapplied overhead balance is adjusted directly to Cost of Goods Sold as follows:

Adjusted gross profit = Gross profit - Overapplied overhead = $15,570 + $7,310 = $22,880