Question

Intercity Roofing manufactures and installs custom shingles for use on damaged roofs of residential houses and apartments. The company uses a specialized manufacturing process to ensure the replacement shingles are an exact match with the existing roof. The company uses a job order costing system to apply manufacturing overhead on the basis of direct labour cost. The company estimates that during the next year, it will incur S70,000 in overhead costs and will pay $140,000 in direct labour costs. During the year, the following transactions occurred: a) Purchased $180,000 of direct materials on account. b) Purchased $5,000 of supplies on account. (The supplies consisted of glue and cleaning supplies.) c) Requisitioned $170,000 of direct materials and $4,500 of supplies for use in production. d) Incurred employee costs: i. Direct labour $150,000 ii. Indirect labour 40,000 iii. Administrative salaries 190,000 iv. Sales salaries 30,000 v. Sales commissions 90,000 e) Advertised on local television: $5,000 1) Rent: $12,000. 40% of the space related to sales offices, 60% was a shop used in production of roofing materials. B) Depreciation: $25,000. 70% relates to roofing equipment, 30% relates to office equipment. h) Insurance expired: $15,000. 90% relates to the factory, the remainder relates to insurance on the office equipment i) Manufacturing overhead costs were applied to production i) Goods costing $375,000 were completed. k) The company had sales on account of $800,000. According to cost data, the jobs cost $350,000. Required: a) For items A through Kabove, record journal entries. Unless otherwise noted, assume all transactions were on account. b) Was overhead overapplied or underapplied for the period? By how much? c) Record a journal entry to close overhead to cost of goods sold. d) Based on the information above, prepare an income statement for the company - assume a 20% tax rate.

Answer 1

(a)Journal Entries:

Credit($) Transactions (a) Debit($) 180,000 180,000 (b) 5,000 5,000 © 170,000 4,500 174,500 (d) Account titles and Explanations Raw materials inventory Accounts payable (to record the purchase of direct materials on account) Raw materials inventory(indirect material) Accounts payable (to record the purchase of supplies on account) Work-in process inventory Manufacturing overhead Raw materials inventory (to record the issue of direct materials and supplies for use in production) Work-in process(direct labor) Manufacturing overheadlindirect labor) Administrative salaries expense Sales salaries expense Sales commisions expense Salaries and wages payable (to record direct and indirect factory labor costs, and other selling and administrative expenses incurred) Advertising expense Accounts payable (to record the advertising expenses incurred) Manufacturing overhead(factory rent) Rent expense(office rent) Accounts payable (to record factory and office rent incurred) Manufacturing overhead (70%) Deprication expense(30%) Accumulated deprication (deprication recorded on factory and office equipment) 150,000 40,000 190,000 30,000 90,000 500,000 (e) 5,000 5,000 (f) 7,200 4,800 12,000 3) 17,500 7,500 25,000

h (h) 13,500 1,500 15,000 li) 75,000 75,000 li) 375,000 Manufacturing overhead (90%) Insurance expense(10%) Prepaid Insurance (to record insurance incurred on factory and office equipment) Work-in process inventory Manufacturing overhead(Working notes) (to record manufacturing overhead applied to production) Finished goods inventory Work-in process inventory (to record the job finished) Accounts Receivable Sales (to record sales on account) Cost of goods sold Finished goods (to record cost of goods sold) 375,000 (k) 800,000 800,000 350,000 350,000

Working notes:

Manufacturing overhead is applied to production using a pre-determined overhead rate.The pre-determined overhead rate is computed as follows:

Estimated total manufacturing overhead costs/Estimated allocation base

Given: Estimated total manufacturing overhead costs = $70,000

Estimated allocation base(estimated direct labor costs) = $140,000

Predetermined manufacturing overhead rate = 70,000/140,000

= $0.50per direct labor costs

Total manufacturing overheads applied will be $75,000($0.50 * $150,000(actual direct labor cost charged to production).

(b)Computation of overapplied or underapplied manufacturing overhead:

Actual factory overhead: Indirect materials Indirect labor factory rent Deprication Expired Insurance Total Applied manufacturing overhead (i) Underapplied manufacturing overhead 4,500 40,000 7,200 17,500 13,500 82,700 75,000 7,700

Note:If the amount applied exceeds the actual costs incurred ,the manufacturing overhead account will have a credit balance.This credit is described as overapplied manufacturing overhead.If the amount applied is less than the actual costs incurred,the manufacturing overhead account will have a debit balance.This debit is described as underapplied manufacturing overhead.

(c)The entry to record the closing of $7,700 of underapplied overhead to Cost of Goods Sold would be as follows:

Transactions Account titles and Explanations Cost of goods sold Manufacturing overhead Debit($) Credit($) 7,700 7,700

(d)Income Statement:

800,000 357,700 442,300 Income Statement Sales Less:Cost of goods sold ($350,000+$7,700) Gross margin Less:Selling and administrative expenses Sales Commissions expense rent expense deprication expense Sales salaries expense Insurance expense Advertising expense Administrative salaries expense Net operating income 90,000 4,800 7,500 30,000 1,500 5,000 190,000 328,800 113,500