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	$	15,700
Work in Process Inventory		6,600
Finished Goods Inventory		20,500

The following transactions occurred during January:

(a) Purchased materials on account for $26,600.
(b) Issued materials to production totaling $20,400, 90 percent of which was traced to specific jobs and the remainder of which was treated as indirect materials.
(c) Payroll costs totaling $18,000 were recorded as follows:
    $10,700 for assembly workers
     2,200 for factory supervision
     1,800 for administrative personnel
      3,300 for sales commissions
(d) Recorded depreciation: $4,600 for factory machines, $1,400 for the copier used in the administrative office.
(e) Recorded $1,800 of expired insurance. Forty percent was insurance on the manufacturing facility, with the remainder classified as an administrative expense.
(f) Paid $6,300 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 $2,100 for direct materials, $2,300 for direct labor, and $4,600 for applied overhead.
(i) Sold jobs costing $50,600. The revenue earned on these jobs was $65,780.

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.

Answer 1

1.

Raw Materials Inventory					Work in Process Inventory
Beg. Bal.	15700				Beg. Bal.	6600
(a)	26600	18360	(b)		(b)	18360	48060	(h)
		2040	(b)		(c)	10700
End. Bal.	21900				(g)	21400
					End. Bal.	9000
Finished Goods Inventory					Cost of Goods Sold
Beg. Bal.	20500				Beg. Bal.	0
(h)	48060	50600	(i)		(i)	50600
End. Bal.	17960				End. Bal.	50600
Manufacturing Overhead					Selling, General, and Administative Expenses
Beg. Bal.	0				Beg. Bal.	0
(b)	2040	21400	(g)		(c)	1800
(c)	2200				(c)	3300
(d)	4600				(d)	1400
(e)	720				(e)	1080
(f)	6300
					End. Bal.	7580
End. Bal.		5540
Sales Revenue
Beg. Bal.		0
		65780	(i)
End. Bal.		65780

2. Unadjusted Gross Profit: $15180

Sales revenue $65780 - Unadjusted Cost of goods sold $50600 = $15180

3. Manufacturing Overhead Overapplied $5540

Overhead incurred $15860 - Overhead applied $21400 = Overhead overapplied $5540

4. Adjusted Gross Profit: $24150

Sales revenue $65780 - Adjusted Cost of goods sold ($50600 - $5540) = $65780 - $45060 = $20720