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 $76,500 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	$	10,200
Work in process	$	4,700
Finished goods	$	8,100

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 168,000.
2. Raw materials used in production, $141,000 (materials costing $126,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	169,000
Indirect labor	$	219,600
Sales commissions	$	28,000
Administrative salaries	$	47,000

4. Rent for the year was $19,000 ($13,000 of this amount related to factory operations, and the remainder related to selling and administrative activities).
5. Utility costs incurred in the factory, $11,000.
6. Advertising costs incurred, $15,000.
7. Depreciation recorded on equipment, $23,000. ($15,000 of this amount related to equipment used in factory operations; the remaining $8,000 related to equipment used in selling and administrative activities.)
8. Record the manufacturing overhead cost applied to jobs.
9. Goods that had cost $229,000 to manufacture according to their job cost sheets were completed.
10. 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 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

1) journal entries ,.

S.no	particular	DEBIT ($)	CREDIT ($)
1	Raw material	168000
	Accounts payable		168000
2	work in process	126000
	Manufacturing OVERHEAD	15000
	Raw material inventory		141000
3	work in process	169000
	Manufacturing OVERHEAD	219600
	Sale commission	28000
	Administrative salaries	47000
	Wages payable		463600
4	Manufacturing OVERHEAD	13000
	Rental expenses	6000
	Rental payable		19000
5	Manufacturing OVERHEAD	11000
	Accounts payable		11000
6	advertising expenses	15000
	Accounts payable		15000
7	Manufacturing OVERHEAD	15000
	Depreciation	8000
	To accumulated depreciation		23000
8	work in process (note below)	287300
	Manufacturing OVERHEAD		287300
9	finished goods	229000
	Work in process		229000
10	accounts receivable	513000
	Sales		513000
11	cost of goods sold	218000
	Finished goods		218000

Note: pre determined OVERHEAD rate=$76500/$45000=1.7

Appiled overhead =169000×1.7= $287300

2) RAW MATERIAL INVENTORY

Beginning balance	10200	work in process	126000
Accounts payable	168000	Manufacturing OVERHEAD	15000
		Balance	37200

work in process

Beginning balance	4700	finished goods	229000
RAW MATERIAL inventory	126000
Wages payable	169000	balance	358000
Manufacturing OVERHEAD	287300

Manufacturing OVERHEAD

RAW MATERIAL inventory	15000	work in process	287300
Wages payable	219600
Rental payable	13000
Accounts payable	11000
Accumulated depreciation	15000
Overapplied	13700

FINISHED GOODS

Beginning balance	8100	cost of goods sold	218000
Work in process	229000	balance	19100

  cost of goods sold

Finished goods	218000	Manufacturing (overapplied)	13700
		Balance	204300

3a)

Manufacturing OVERHEAD appiled= actual overhead - applied overhead

= $273600 - $287300. = $13700

3b). Manufacturing OVERHEAD $13700

   Cost of goods sold. $13700

4. Income statement

Particular	amount ($)
Sales	513000
(-) cost of goods sold	(204300)
Gross profit	308700
(-) expenses
Sales commission	(28000)
Administrative salaries	(47000)
Rent	(6000)
Advertising	(15000)
Depreciation	(8000)
net operating income	204700

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