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: $ 10,100 5,000 8,700 Raw materials Work in process Finished goods During the year, the following transactions were completed: a. Raw materials purchased on account, $ 160,000 b. Raw materials used in production, $141,000 (materials costing $125,000 were charged directly to jobs; the remaining materials were indirect) c. Costs for employee services were incurred as follows: Direct labor 160,000 Indirect labor 230,400 $ 28,000 $44,000 Sales commissions Administrative salaries

Answer 1

1) Predetermined overhead rate= Estimated manufacturing costs/Estimated labor cost

= $85500/45000= 190% of direct labor cost

Transaction	Account titles and explanation	Debit	Credit
a	Raw materials	$160000
	Accounts payable		$160000
	(To record raw materials purchased on account)
b	Work in process	$125000
	Manufacturing overhead (141000-125000)	$16000
	Raw materials		$141000
	(To record raw materials used in production)
c	Work in process	$160000
	Manufacturing overhead	$230400
	Sales commissions expense	$28000
	Advertising expense	$44000
	Cash		$462400
	(To record employee services incurred)
d	Manufacturing overhead	$13400
	Rent expense (18200-13400)	$4800
	Cash		$18200
	(To record rent for the year)
e	Manufacturing overhead	$12000
	Cash		$12000
	(To record utility costs paid)
f	Advertising expense	$13000
	Cash		$13000
	(To record advertising costs paid)
g	Manufacturing overhead	$18000
	Depreciation expense	$5000
	Accumulated depreciation		$23000
	(To record depreciation expense)
h	Work in process (160000*190%)	$304000
	Manufacturing overhead		$304000
	(To record manufacturing overhead applied)
i	Finished goods	$225000
	Work in process		$225000
	(To record work in process transferred to finished goods)
j	Cash	$515000
	Sales		$515000
	(To record sales on account)
	Cost of goods sold	$218000
	Finished goods		$218000
	(To record Cost of goods sold)

2)

Raw Materials					Work in Process
Beg. Bal.	$10100				Beg. Bal.	$5000
a	160000	141000	b		b	125000	225000	i
					c	160000
					h	304000
End. Bal.	$29100				End. Bal.	$369000
Finished Goods					Manufacturing Overhead
Beg. Bal.	$8700				Beg. Bal.	$0
i	225000	218000	j		b	16000	304000	h
					c	230400
					d	13400
					e	12000
					g	18000
End. Bal.	$15700				End. Bal.		$14200
Cost of Goods Sold
Beg. Bal.	$0
j	218000
End. Bal.	$218000

3-A) Actual manufacturing overhead= $16000+230400+13400+12000+18000= $289800

Overapplied or underapplied overhead= Actual manufacturing overhead-Applied manufacturing overhead

= $289800-304000= $14200 Overapplied

B)

Transaction	Account titles and explanation	Debit	Credit
1	Manufacturing overhead	$14200
	Cost of goods sold		$14200
	(To record overapplied overhead)

4)

Gold Nest Company
Income Statement
Sales		$515000
Less: Adjusted cost of goods sold		(203800)
Gross profit		311200
Less: Selling and administrative expenses
Sales commissions	28000
Administrative salaries	44000
Rent expense	4800
Advertising expense	13000
Depreciation expense	5000
Total selling and administrative expenses		(94800)
Net operating income		$216400

Adjusted cost of goods sold= Unadjusted cost of goods sold-Overapplied overhead

= $218000-14200

= $203800