Question

Problem 3-16 Comprehensive Problem (LO3-1, LO3-2, LO3-4) points 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 $76,000 of manufacturing overhead for an estimated activity level of $40,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows: eBook Reference Raw $10,300 materials $ 4,700 Work in process Finished goods $ 9,000 During the year, the following transactions were completed: a. Raw materials purchased on account. $ 160.000. b. Raw materials used in production, $142,000 (materials costing $127.000 were charged directly to jobs; the remaining materials were indirect). c. Costs for employee services were incurred as follows: Direct labor $173,000 Indirect labor $250,000 Sales commissions $ 26,000 Administrative salaries $ 46,000 d. Rent for the year was $18.900 ($13,500 of this amount related to factory operations, and the remainder related to selling and administrative activities). e. Utility costs incurred in the factory. $12.000 t Advertising costs incurred, $13.000. q. Depreciation recorded on equipment, $21,000. ($17,000 of this amount related to equipment used in factory operations the remaining $4.000 related to equipment used in selling and administrative activities.) h Record the manufacturing overhead cost applied to jobs. L Goods that had cost $228,000 to manufacture according to their job cost sheets were completed. I Sales for the year (all paid in cash) totaled $513,000. The total cost to manufacture these goods according to their job cost sheets was $218.000 Required: 1. Prepare fournal 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 lournal entries to these T-accounts (don't forget to enter the beginning balances in your inventory accounts). 3A Is Manufacturing Overhead underapplied or overapolled 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

Predetermined manufacturing overhead rate = Budgeted manufacturing overhead/Total estimated direct labor cost = $76000/$40000 = 190% of direct labor cost

1.

Transaction	General Journal	Debit	Credit
a.	Raw Materials	168000
	Accounts payable		168000
	(To record raw materials purchased on account)
b.	Work in process	127000
	Manufacturing overheads	15000
	Raw Materials		142000
	(To record raw materials requisitioned)
c.	Work in process	173000
	Manufacturing overheads	258000
	Sales commission expense	26000
	Administrative salaries expense	46000
	Cash		503000
	(To record cost of employee services incurred)
d.	Manufacturing overheads	13500
	Rent expense	5400
	Cash		18900
	(To record rent incurred)
e.	Manufacturing overheads	12000
	Cash		12000
	(To record utilities costs incurred)
f.	Advertising expense	13000
	Cash		13000
	(To record advertising costs incurred)
g.	Manufacturing overheads	17000
	Depreciation expense	4000
	Accumulated depreciation-equipment		21000
	(To record depreciation on equipment)
h.	Work in process	328700
	Manufacturing overheads (190% x $173000)		328700
	(To record manufacturing overhead applied to jobs)
i.	Finished goods	228000
	Work in process		228000
	(To record cost of jobs completed)
j(1)	Cash	513000
	Sales Revenue		513000
	(To record sales on account)
j(2)	Cost of goods sold	218000
	Finished goods		218000
	(To record cost of goods sold)

2.

Raw Materials
Beg. Bal.	10300	142000	b.
a.	168000
End. Bal.	36300
Work in Process
Beg. Bal.	4700	228000	i.
b.	127000
c.	173000
h.	285450
End. Bal.	362150
Finished Goods
Beg. Bal.	9000	218000	j(2)
i.	228000
End. Bal.	19000
Manufacturing Overhead
b.	15000	328700	h.
c.	258000
d.	13500
e.	12000
g.	17000
End. Bal.		13200
Cost of Goods Sold
j(2)	218000
End. Bal.	218000

3-a. Overapplied

Manufacturing overhead incurred $315500 - Manufacturing overhead applied $328700 = Overheads overapplied $13200

3-b.

Event	General Journal	Debit	Credit
1	Manufacturing overhead	13200
	Cost of goods sold		13200
	(To close manufacturing overhead to cost of goods sold)

4.

Gold Nest Company
Income Statement
For the Year Ended
Sales		513000
Cost of goods sold ($218000 - $13200)		204800
Gross profit		308200
Selling and administrative expenses:
Sales commission expense	26000
Advertising expense	13000
Administrative salaries expense	46000
Rent expense	5400
Depreciation expense	4000
Total selling and administrative expenses		94400
Net income		213800