Question

Problem 3-17 Cost Flows; T-Accounts; Income Statement [LO3-2, LO3-3, LO3-4]

Supreme Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1, are given below.

Supreme Videos, Inc. Balance Sheet January 1
Assets
Current assets:
Cash				$	84,000
Accounts receivable					123,000
Inventories:
Raw materials (film, costumes)	$	51,000
Videos in process		20,000
Finished videos awaiting sale		102,000			173,000
Prepaid insurance					13,200
Total current assets					393,200
Studio and equipment		772,000
Less accumulated depreciation		231,000			541,000
Total assets				$	934,200
Liabilities and Stockholders' Equity
Accounts payable				$	133,200
Capital stock	$	510,000
Retained earnings		291,000			801,000
Total liabilities and stockholders' equity				$	934,200

  

Because the videos differ in length and in complexity of production, the company uses a job-order costing system to determine the cost of each video produced. Studio (manufacturing) overhead is charged to videos on the basis of camera-hours of activity. The company’s predetermined overhead rate for the year is based on a cost formula that estimated $225,000 in manufacturing overhead for an estimated allocation base of 5,000 camera-hours. The following transactions occurred during the year:

1. Film, costumes, and similar raw materials purchased on account, $206,000.
2. Film, costumes, and other raw materials used in production, $221,000 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect).
3. Utility costs incurred on account in the production studio, $93,000.
4. Depreciation recorded on the studio, cameras, and other equipment, $105,000. Three-fourths of this depreciation related to production of the videos, and the remainder related to equipment used in marketing and administration.
5. Advertising expense incurred on account, $151,000.
6. Costs for salaries and wages were incurred on account as follows:

Direct labor (actors and directors)	$	103,000
Indirect labor (carpenters to build sets, costume designers, and so forth)	$	131,000
Administrative salaries	$	116,000

7. Prepaid insurance expired during the year, $9,100 (80% related to production of videos, and 20% related to marketing and administrative activities).
8. Miscellaneous marketing and administrative expenses incurred on account, $10,700.
9. Studio (manufacturing) overhead was applied to videos in production. The company used 8,000 camera-hours during the year.
10. Videos that cost $571,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.
11. Sales for the year totaled $967,000 and were all on account. The total cost to produce these videos according to their job cost sheets was $621,000.
12. Collections from customers during the year totaled $871,000.
13. Payments to suppliers on account during the year, $521,000; payments to employees for salaries and wages, $328,000.

Required:

1. Prepare a T-account for each account on the company’s balance sheet and enter the beginning balances.

2. Record the transactions directly into the T-accounts. Key your entries to the letters (a) through (m) above.

3. Is the Studio (manufacturing) Overhead account underapplied or overapplied for the year?

4. Prepare a schedule of cost of goods manufactured.

5. Prepare a schedule of cost of goods sold.

6. Prepare an income statement for the year.

Answer 1

Answer-1 & 2:

No.	Account Title	Debit	Credit
1	Raw material inventory	$    206,000
	Account payable		$ 206,000
2	Work in process inventory	187,850
	Manufacturing overhead	33,150
	Raw material inventory		221,000
3	Manufacturing overhead	93,000
	Account payable		93,000
4	Manufacturing overhead	78,750
	Depreciation expense	26,250
	Accumulated depreciation		105,000
5	Advertising expense	151,000
	Account payable		151,000
6	Work in process inventory	103,000
	Manufacturing overhead	131,000
	Salaries expense	116,000
	Salaries and wages payable		350,000
7	Manufacturing overhead	7,280
	Selling and administrative	1,820
	Prepaid insurance		9,100
8	Selling and administrative	10,700
	Account payable		10,700
9	Work in process inventory	360,000
	Manufacturing overhead 225,000/5,000*8,000)		360,000
10	Finished goods inventory	571,000
	Work in process inventory		571,000
11	Account receivable	967,000
	Sales		967,000
12	Cost of goods sold	621,000
	Finished goods inventory		621,000
13	Cash	871,000
	Account receivable		871,000
14	Account payable	521,000
	Cash		521,000
15	Salaries and wages payable	328,000
	Cash		328,000

RM Inventory 51000 221000 206000 Finished Video 102000 621000 571000 Video in process 20000 571000 187850 103000 360000 Cash 84000 521000 871000 328000 Mfg OH 33150 360000 93000 78750 131000 7280 16820 106000 36000 52000 99850 COGS 621000 Sales revenue 967000 Account receivable 123000 871000 967000 Prepaid insurance 13200 9100 Account payable 521000 133200 206000 93000 151000 10700 621000 967000 219000 4100 72900

Answer-3:

The Studio (manufacturing) Overhead account is over-applied by $16,820.

Answer-4:

Supreme Videos, Inc. Schedule of Cost of Goods Manufactured For the Year Ended December 31 Direct Materials: Beginning raw materials inventory 51,000 Add: Purchase of raw materials 206,000 Total raw materials available 257,000 Less: Ending raw materials inventory 36,000 Raw materials used in production 221,000 Less: Indirect materials used 33,150 Direct labour Manufacturing overhead applied to work in process Total manufacturing costs Add: Beginning videos in process inventory 187,850 103,000 360,000 650,850 20,000 670,850 99,850 571,000 Less: Ending videos in process inventory Cost of goods manufactured

Answer-5:

Supreme Videos, Inc. Schedule of Cost of Goods Sold For the Year Ended December 31 Beginning finished goods inventory 102,000 Add: Cost of goods manufactured 571,000 Cost of goods available for sale Less: Ending finished goods inventory Unadjusted cost of goods sold Less: Overapplied ovehead Adjusted cost of goods sold 673,000 52,000 621,000 16,820 604,180