Question

Problem 3-16 Comprehensive Problem [LO3-1, LO3-2, LO3-4]

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	$	10,600
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, $142,000 (materials costing $121,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	167,000
Indirect labor	$	240,000
Sales commissions	$	28,000
Administrative salaries	$	42,000

4. Rent for the year was $18,000 ($13,900 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, $13,000.
7. Depreciation recorded on equipment, $20,000. ($17,000 of this amount related to equipment used in factory operations; the remaining $3,000 related to equipment used in selling and administrative activities.)
8. Record the manufacturing overhead cost applied to jobs.
9. Goods that had cost $226,000 to manufacture according to their job cost sheets were completed.
10. Sales for the year (all paid in cash) totaled $508,000. The total cost to manufacture these goods according to their job cost sheets was $215,000.

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

journal entries

S.no	account title particulars	debit ($)	credit ($)
1	RAW material inventory	161000
	Cash		161000
2	work in process	121000
	Manufacturing overhead	21000
	Raw material inventory		142000
3	work in process	167000
	Manufacturing overhead	240000
	Sales commission	28000
	Administrative salaries	42000
	Cash		477000
4	manufacturing overhead	13900
	Rent expenses	4100
	Cash		18000
5	manufacturing overhead	12000
	Cash		12000
6	advertising expenses	13000
	Cash		13000
7	manufacturing overhead	17000
	Depreciation expenses	3000
	Accumulated depreciation		20000
8	work in process(note)	317300
	Manufacturing overhead		317300
9	finished goods	226000
	Work in process		226000
10	cash	508000
	Sales		508000
11	cost of goods sold	215000
	Finished goods		215000

   Note

   Pre determine overhead rate=85500/45000=1.9 per direct labour

   =167000×1.9=3173000

2). T accounts

RAW MATERIAL INVENTORY

Beginning balance	10600	work in process	121000
Cash	161000	manufacturing overhead	21000
		Balance	29600

  work in process

Beginning balance	4800	finished goods	226000
RAW MATERIAL INVENTORY	121000
Cash	167000
Manufacturing overhead	317300	balance	384100

manufacturing overhead

Raw material inventory	21000	work in process	317300
Cash	240000
Cash	13900
Cash	12000
Cash	17000
Balance (overapplied)	13400

FINISHED GOODS

Beginning balance	8400	cost of goods sold	215000
Work in process	226000
		Balance	19400

  cost of goods sold

Finished goods	215000	manufacturing overhead (overapplied)	13400
		Balance	201600

3A MANUFACTURING OVERHEAD OVERAPPLIED=. ACTUAL OVERHEAD-APPILED OVERHEAD

= 303900 - 317300= 13400

3B

Manufacturing overhead	13400
Cost of goods sold		13400

4. INCOME STATEMENT

     

Particular	amount
Sales	508000
Less cost of goods sold	(201600)
Gross profit	306400
Less expenses
Sales commission	(28000)
Administrative salaries	(42000)
Rent	(4100)
Advertising	(3000)
Depreciation	(13000)

  ​​​​​

operating income

216300

. ALL THE BEST

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