Question

Froya Fabrikker A/S of Bergen, Norway, is a small company that manufactures specialty heavy equipment for use in North Sea oil fields. The company uses a job-order costing system that applies manufacturing overhead cost to jobs on the basis of direct labor-hours. Its predetermined overhead rate was based on a cost formula that estimated $350,000 of manufacturing overhead for an estimated allocation base of 1,000 direct labor-hours. The following transactions took place during the year:

1. Raw materials purchased on account, $250,000.
2. Raw materials used in production (all direct materials), $235,000.
3. Utility bills incurred on account, $69,000 (90% related to factory operations, and the remainder related to selling and administrative activities).
4. Accrued salary and wage costs:

Direct labor (1,075 hours)	$	280,000
Indirect labor	$	100,000
Selling and administrative salaries	$	160,000

5. Maintenance costs incurred on account in the factory, $64,000
6. Advertising costs incurred on account, $146,000.
7. Depreciation was recorded for the year, $82,000 (75% related to factory equipment, and the remainder related to selling and administrative equipment).
8. Rental cost incurred on account, $107,000 (80% related to factory facilities, and the remainder related to selling and administrative facilities).
9. Manufacturing overhead cost was applied to jobs, $ ? .
10. Cost of goods manufactured for the year, $870,000.
11. Sales for the year (all on account) totaled $1,700,000. These goods cost $900,000 according to their job cost sheets.

The balances in the inventory accounts at the beginning of the year were:

Raw Materials	$	40,000
Work in Process	$	31,000
Finished Goods	$	70,000

Required:

1. Prepare journal entries to record the preceding transactions.

The raw materials were purchased for use in production, $250,000 on account.

The raw materials used in production (all direct materials), $235,000.

The utility bills were incurred on account, $69,000 (90% related to factory operations, and the remainder related to selling and administrative activities).

The salary and wage costs accrued were $280,000 (Direct labor), $100,000 (Indirect labor), $160,000 (Selling and administrative salaries).

The maintenance costs were incurred on account in the factory, $64,000.

The advertising costs were incurred on account, $146,000.

The depreciation was recorded for the year, $82,000 (75% related to factory equipment, and the remainder related to selling and administrative equipment).

The entry for rental cost incurred on account on buildings, $107,000 (80% related to factory facilities, and the remainder related to selling and administrative facilities).

The entry for manufacturing overhead cost applied to jobs.

The cost of goods manufactured for the year, $870,000.

The sales for the year (all on account) totaled $1,700,000.

The goods cost $900,000 according to their job cost sheets.

2. Post your entries to T-accounts. (Don’t forget to enter the beginning inventory balances above.)

3. Prepare a schedule of cost of goods manufactured.

4A. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

4B. Prepare a schedule of cost of goods sold.

5. Prepare an income statement for the year.

Answer 1

1) journal entries

S.no	particular	Debit ($)	credit ($)
1	RAW MATERIAL inventory	250000
	Accounts payable		250000
2	work in process	235000
	RAW MATERIAL inventory		235000
3	Manufacturing overhead	62100
	Utility expenses	6900
	Utilities payable		69000
4	work in process	280000
	MANUFACTURING OVERHEAD	100000
	Selling and administrative salaries	160000
	Wages payable		540000
5	Manufacturing overhead	64000
	Accounts payable		64000
6	advertising	146000
	Accounts payable		146000
7	Manufacturing overhead(82000×75%)	61500
	Depreciation (82000×25%)	20500
	Accumulated depreciation		82000
8	Manufacturing overhead(107000×80%)	85600
	Rental(107000×20%)	21400
	Rental payable		107000
9	work in process(note below)	376250
	Manufacturing overhead		376250
10	finished goods	870000
	Work in process		870000
11	accounts receivable	1700000
	Sales		1700000
12	cost of goods sold	900000
	Finished goods		900000

Note pre determined OVERHEAD rate=350000/1000= 350 per direct labour hour

   Applied overhead=1075hr×350=$376250

2) T accounts

   Raw material inventory

Beginning balance	40000	work in process	235000
Accounts payable	250000	balance	55000

  work in process

Beginning balance	31000	finished goods	870000
RAW MATERIAL inventory	235000
Wages payable	280000
Manufacturing overhead	376250	balance	52250

finished goods

Beginning balance	70000	cost of goods sold	900000
Work in process	870000	balance	40000

  Manufacturing overhead

Utility expenses	62100
Wages payable	100000	work in process	376250
Accounts payable	64000
Accumulated depreciation	61500
Rental payable	85600
Balance(overapplied)	3050

3) SCHEDULE OF COST OF GOODS MANUFACTURED

Direct material	235000
Direct labour	280000
Manufacturing overhead	376250
Total Manufacturing cost	891250
Add beginning work in process	31000
Less ending work in process	(52250)
cost of goods manufactured	870000

4a)

Manufacturing overhead	3050
Cost of goods sold		3050

4b) SCHEDULE OF COST OF GOODS SOLD

Beginning finished goods	70000
Cost of goods manufactured	87000
Cost of goods available for sales	940000
Less ending finished goods	(40000)
Unadjusted cost of goods sold	900000
Less overapplied overhead	(3050)
cost of goods sold	896950

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