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 $399,000 of manufacturing overhead for an estimated allocation base of 1,050 direct labor-hours. The following transactions took place during the year:

1. Raw materials purchased on account, $280,000.
2. Raw materials used in production (all direct materials), $265,000.
3. Utility bills incurred on account, $75,000 (80% related to factory operations, and the remainder related to selling and administrative activities).
4. Accrued salary and wage costs:

Direct labor (1,100 hours)	$	310,000
Indirect labor	$	106,000
Selling and administrative salaries	$	190,000

5. Maintenance costs incurred on account in the factory, $70,000
6. Advertising costs incurred on account, $152,000.
7. Depreciation was recorded for the year, $88,000 (85% related to factory equipment, and the remainder related to selling and administrative equipment).
8. Rental cost incurred on account, $113,000 (90% 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, $930,000.
11. Sales for the year (all on account) totaled $2,000,000. These goods cost $960,000 according to their job cost sheets.

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

Raw Materials	$	46,000
Work in Process	$	37,000
Finished Goods	$	76,000

Required:

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

4A.

Predetermined overhead rate = Estimated total overhead / Estimated direct labor hours

Predetermined overhead rate = $399,000 / 1,050 = $380

Applied manufacturing overhead = 1,100 * $380 = $418,000

Actual manufacturing overhead:

Utility bills ($75,000*80%)	$60,000
Indirect labor	106,000
Maintenance cost	70,000
Depreciation-factory equipment (88,000*85%)	74,800
Rental cost (113,000*90%)	101,700
Total	$412,500

Under or over applied overhead = Applied overhead - Actual overhead

Under or over applied overhead = $418,000 - 412,500

Over applied overhead = $5,500

General Journal	Debit	Credit
Manufacturing overhead	$5,500
Cost of goods sold		$5,500

4B.

Schedule of Cost of Goods Sold
Beginning finished goods	$76,000
Cost of goods manufactured	930,000
Total cost of goods available for sale	1,006,000
Ending finished goods ($1,006,000-960,000)	(46,000)
Unadjusted cost of goods sold	960,000
Over applied overhead	(5,500)
Cost of goods sold	$954,500

5.

Income Statement
Sales		$2,000,000
Cost of goods sold		(954,500)
Gross profit		1,045,500
Selling and administrative expenses:
Utility bills (75,000*20%)	$15,000
Selling and administrative salaries	190,000
Advertising cost	152,000
Depreciation-Selling and administrative equipment (88,000*15%)	13,200
Rental cost (113,000*10%)	11,300
Total		(381,500)
Net income		$664,000