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 $105,000 of manufacturing overhead for an estimated activity level of $50,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,400
Work in process	$	4,800
Finished goods	$	8,400

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 161,000.
2. Raw materials used in production, $148,000 (materials costing $130,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	179,000
Indirect labor	$	299,400
Sales commissions	$	23,000
Administrative salaries	$	45,000

4. Rent for the year was $18,800 ($13,600 of this amount related to factory operations, and the remainder related to selling and administrative activities).
5. Utility costs incurred in the factory, $14,000.
6. Advertising costs incurred, $14,000.
7. Depreciation recorded on equipment, $21,000. ($16,000 of this amount related to equipment used in factory operations; the remaining $5,000 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 $509,000. The total cost to manufacture these goods according to their job cost sheets was $218,000.

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	161000
	Accounts payable		161000
2	work in process	130000
	Manufacturing OVERHEAD	18000
	RAW MATERIAL inventory		148000
3	work in process	179000
	Manufacturing OVERHEAD	299400
	Sales commission	23000
	Administrative salaries	45000
	Wages payable
4	Manufacturing OVERHEAD	13600
	Rental expenses	5200
	Rental payable		18800
5	Manufacturing OVERHEAD	14000
	Accounts payable		14000
6	advertising expenses	14000
	Accounts payable		14000
7	Manufacturing OVERHEAD	16000
	Depreciation	5000
	Accumulated depreciation		21000
8	work in process (below note)	375900
	Manufacturing OVERHEAD		375900
9	finished goods	229000
	Work in process		229000
10	accounts receivable	509000
	Sales		509000
11	cost of goods sold	218000
	Finished goods		218000

pre determined OVERHEAD rate=$105000/$50000= 2.1per labour cost

   =179000×2.1=$375900

2) T accounts

   Raw material inventory

Beginning balance	10400	work in process	130000
Accounts payable	161000	Manufacturing OVERHEAD	18000
		Balance	23400

   work in process

Beginning balance	4800	finished goods	229000
RAW MATERIAL inventory	130000
Wages payable	179000	balance	460700
Manufacturing OVERHEAD	375900

Manufacturing OVERHEAD

RAW MATERIAL inventory	18000	work in process	375900
Wages payable	299400
Rental payable	13600
Accounts payable	14000
Accumulated depreciation	16000
Balance (overapplied)	14900

  FINISHED GOODS

Beginning balance	8400	cost of goods sold	218000
Work in process	229000	balance	19400

  cost of goods sold

Finished goods	218000	Manufacturing OVERHEAD (overapplied)	14900
		Balance	203100

  3a) Manufacturing OVERHEAD OVERAPPLIED/underapplied= actual overhead - applied overhead

   = $361000 - $375900=$14900

3b)

Manufacturing OVERHEAD (overapplied)	14900
Cost of goods sold		14900

4). Income statement

Particular	amount ($)
Sales	509000
(-) cost of goods sold	(203100)
Gross profit	305900
(-) expenses
Sales commission	(23000)
Administrative salaries	(45000)
Rent	(5200)
Advertising	(14000)
Depreciation	(5000)
NET OPERATING INCOME	213700

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