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 $95,000 of manufacturing overhead for an estimated activity level of 350.000 direct labor dollars. At the beginning of the year, the inventory balances were as follows: Raw materials Work in process Finished goods $10,700 $ 4,300 $ 9,000 During the year, the following transactions were completed: a. Raw materials purchased on account, $ 170,000. b. Raw materials used in production, $147,000 (materials costing $121,000 were charged directly to jobs; the remaining materials were indirect). c. Costs for employee services were incurred as follows: Direct labor Indirect labor Sales commissions Administrative salaries $ 158,000 $ 213,900 $ 24,000 $ 42,000

Answer 1

Predetermined manufacturing overhead rate = Budgeted manufacturing overhead/Total estimated direct labor cost = $95000/$50000 = 190% of direct labor cost

1.

Transaction	General Journal	Debit	Credit
a.	Raw Materials	170000
	Accounts payable		170000
	(To record raw materials purchased on account)
b.	Work in process	121000
	Manufacturing overheads	26000
	Raw Materials		147000
	(To record raw materials requisitioned)
c.	Work in process	158000
	Manufacturing overheads	213900
	Sales commission expense	24000
	Administrative salaries expense	42000
	Cash		437900
	(To record cost of employee services incurred)
d.	Manufacturing overheads	13800
	Rent expense	4500
	Cash		18300
	(To record rent incurred)
e.	Manufacturing overheads	15000
	Cash		15000
	(To record utilities costs incurred)
f.	Advertising expense	15000
	Cash		15000
	(To record advertising costs incurred)
g.	Manufacturing overheads	17000
	Depreciation expense	6000
	Accumulated depreciation-equipment		23000
	(To record depreciation on equipment)
h.	Work in process	300200
	Manufacturing overheads (190% x $158000)		300200
	(To record manufacturing overhead applied to jobs)
i.	Finished goods	229000
	Work in process		229000
	(To record cost of jobs completed)
j(1)	Cash	505000
	Sales Revenue		505000
	(To record sales on account)
j(2)	Cost of goods sold	217000
	Finished goods		217000
	(To record cost of goods sold)

2.

Raw Materials
Beg. Bal.	10700	147000	b.
a.	170000
End. Bal.	33700
Work in Process
Beg. Bal.	4300	229000	i.
b.	121000
c.	158000
h.	300200
End. Bal.	354500
Finished Goods
Beg. Bal.	9000	218000	j(2)
i.	229000
End. Bal.	20000
Manufacturing Overhead
b.	26000	300200	h.
c.	213900
d.	13800
e.	15000
g.	17000
End. Bal.		14500
Cost of Goods Sold
j(2)	217000
End. Bal.	217000

3-a. Overapplied

Manufacturing overhead incurred $285700 - Manufacturing overhead applied $300200 = Overheads overapplied $14500

3-b.

Event	General Journal	Debit	Credit
1	Manufacturing overhead	14500
	Cost of goods sold		14500
	(To close manufacturing overhead to cost of goods sold)

4.

Gold Nest Company
Income Statement
For the Year Ended
Sales		505000
Cost of goods sold ($217000 - $14500)		202500
Gross margin		302500
Selling and administrative expenses:
Rent expense	4500
Advertising expense	15000
Sales commissions	24000
Administrative salaries expense	42000
Depreciation expense	6000
		91500
Net income		211000