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 $84,000 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	$	10,700
Work in process	$	4,200
Finished goods	$	8,100

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 167,000.
2. Raw materials used in production, $143,000 (materials costing $129,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	173,000
Indirect labor	$	293,600
Sales commissions	$	23,000
Administrative salaries	$	45,000

4. Rent for the year was $18,100 ($13,700 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, $14,000.
7. Depreciation recorded on equipment, $24,000. ($16,000 of this amount related to equipment used in factory operations; the remaining $8,000 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 $517,000. 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

1) journal entries

S.no	particular	Debit ($)	credit ($)
1	Raw material inventory	167000
	Accounts payable		167000
2)	work in process	129000
	Manufacturing OVERHEAD	14000
	RAW MATERIAL inventory		143000
3	work in process	173000
	Manufacturing OVERHEAD	293600
	Sales commission	23000
	Administrative salaries	45000
	Accounts payable		534600
4	Manufacturing OVERHEAD	13700
	Rental expenses	4400
	Rental payable		18100
5	Manufacturing OVERHEAD	13000
	Accounts payable		13000
6	advertising expenses	14000
	Accounts payable		14000
7	Manufacturing OVERHEAD	16000
	Depreciation expenses	8000
	Accumulated depreciation		24000
8	work in process(note below)	363300
	Manufacturing OVERHEAD		363300
9	finished goods	229000
	Work in process		229000
10	accounts receivable	517000
	Sales		517000
11	cost of goods sold	220000	220000
	Finished goods

NOTE): pre determined OVERHEAD=estimated Manufacturing OVERHEAD/estimate direct cost

   =$84000/$40000=$2.1

Overhead appiled= 173000×2.1=$363300

T accounts

   RAW MATERIAL inventory

Beginning balance	$10700	work in process	129000
Accounts payable	$167000	Manufacturing OVERHEAD	14000
		Balance	34700

work in process

Beginning balance	4200	finished goods	229000
RAW MATERIAL inventory	129000
Accounts payable	173000
Manufacturing OVERHEAD	363300
		Balance	440500

finished goods

Beginning balance	8100	cost of goods sold	220000
Work in process	229000
		Balance	17100

Manufacturing OVERHEAD

RAW MATERIAL inventory	$14000	work in process	363300
Payable	$293600
Rent payable	$13700
Accounts payable	$13000
Accumulation depreciation	$16000
Overapplied	13000

3) Manufacturing OVERHEAD OVERAPPLIED=$13000 from above part

3b) Manufacturing OVERHEAD $13000

Copst of goods sold. $13000

4) income statement

Cost of goods sold=$220000-$13000=$207000

Particular	amount ($)
Sales	517000
(-)cogs	(207000)
Gross margin	310000
Expenses
(-) sales commission	(23000)
(-) administrative salaries	(45000)
(-) rent	(4400)
(-) advertising expenses	(14000)
(-) depreciation	(8000)
NET OPERATING INCOME	215600

  

ALL THE BEST