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 $85,500 of manufacturing overhead for an estimated activity level of $45,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,900
Work in process	$	4,800
Finished goods	$	9,000

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 167,000.
2. Raw materials used in production, $141,000 (materials costing $128,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	154,000
Indirect labor	$	223,400
Sales commissions	$	24,000
Administrative salaries	$	49,000

4. Rent for the year was $18,800 ($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, $12,000.
6. Advertising costs incurred, $10,000.
7. Depreciation recorded on equipment, $21,000. ($17,000 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 $499,000. The total cost to manufacture these goods according to their job cost sheets was $217,000.

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.

Raw Materials Work in Process Beg. Bal. Beg. Bal. End. Bal. End. Bal. Finished Goods Manufacturing Overhead Beg. Bal. Beg. Bal. End. Bal. Cost of Goods Sold End. Bal.

Answer 1

	predetermined overhead rate =			85500/45000
				190%
	Accounting titles & Explanations					debit	Credit
a)	Raw materials inventory					167,000
	cash						167,000
b)	work in process inventory					128,000
	Factory overhead					13,000
	Raw materials inventory						141,000
c)	Work in process inventory					154,000
	Factory overhead					223,400
	Sales commission expense					24,000
	Salaries expense					49,000
	cash						450,400
d)	Factory overhead					13,700
	Rent expense					5,100
	cash						18,800
e)	Factory overhead					12,000
	cash						12,000
f)	Advertising expense					10,000
	cash						10,000
g)	Factory overhead					17,000
	Depreciation expense					4,000
	Accumulated depreciation						21,000
h)	work in process inventory					292600
	Factory overhead		(154000*190%)				292600
i)	finished goods inventory					229,000
	work in process inventory						229,000
j)	Cash					499,000
	Sales revenue						499,000
	cost of goods sold					217,000
	finished goods inventory						217,000
	T-Accounts
	Raw materials				Work in process
Bal	10,900				Bal	4,800
a)	167,000	141,000	b)		b)	128,000	229,000	i)
					c)	154,000
Bal	36,900				h)	292600
					Bal	350,400
					Manufacturing overhead
	Finished goods				beg.bal	0
Bal	9,000				b)	13,000	292600	h)
i)	229,000	217,000			c)	223,400
					d)	13,700
Bal	21,000				e)	12,000
					g)	17,000
							13,500	Bal
	cost of goods sold
Beg.bal	0
j)	217,000
3a)	Manufacturing overhead is over applied
3B)	Journal entry
	Account titles & Explanations					Debit	Credit
	Factory overhead					13,500
	Cost of goods sold						13,500
4)		Income Statement
	Sales						499,000
	less : cost of goods sold			(217000-13500)			203,500
	Gross margin						295,500
	less:Selling & administrative expense
	Sales comission					24,000
	Administrative salaries					49,000
	Rent exepense					5,100
	Advertising expense					10,000
	Depreciation expense					4,000	92,100
	Net operating income						203,400