Question

Star Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1 are given below.

Star Videos, Inc.
Balance Sheet
January 1
Assets
Cash				$	84,600
Accounts receivable					103,600
Inventories:
Raw materials (film, costumes)	$	52,800
Videos in process		48,000
Finished videos awaiting sale		80,200			181,000
Prepaid insurance					8,850
Studio and equipment (net)					541,000
Total assets				$	919,050
Liabilities and Stockholders’ Equity
Accounts payable				$	169,000
Retained earnings					750,050
Total liabilities and stockholders’ equity				$	919,050

Because the videos differ in length and in complexity of production, the company uses a job-order costing system to determine the cost of each video produced. Studio (manufacturing) overhead is charged to videos on the basis of camera-hours of activity. The company’s predetermined overhead rate for the year ($40 per camera-hour) is based on a cost formula that estimated $280,000 in manufacturing overhead for an estimated allocation base of 7,000 camera-hours. Any underapplied or overapplied overhead is closed to cost of goods sold. The following transactions were recorded for the year:

1. Film, costumes, and similar raw materials purchased on account, $183,000.
2. Film, costumes, and other raw materials issued to production, $226,000 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect).
3. Utility costs incurred (on account) in the production studio, $84,000.
4. Depreciation recorded on the studio, cameras, and other equipment, $102,800. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration.
5. Advertising expense incurred (on account), $150,500.
6. Salaries and wages paid in cash as follows:

Direct labor (actors and directors)	$	95,200
Indirect labor (carpenters to build sets, costume designers, and so forth)	$	74,500
Administrative salaries	$	110,200

1. Prepaid insurance expired during the year, $7,250 (70% related to production of videos, and 30% related to marketing and administrative activities).
2. Miscellaneous marketing and administrative expenses incurred (on account), $13,950.
3. Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year.
4. Videos that cost $572,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.
5. Sales for the year totaled $1,032,000 and were all on account.
6. The total cost to produce the videos that were sold according to their job cost sheets was $617,490.
7. Collections from customers during the year totaled $982,000.
8. Payments to suppliers on account during the year, $571,000.
9. Underapplied or overapplied overhead $__?__.

Required:

1. Prepare a transaction analysis that records all of the above transactions.

2. Prepare a schedule of cost of goods manufactured for the year.

3. Prepare a schedule of cost of goods sold for the year.

4. Prepare an income statement for the year.

Answer 1

(1.) TRANSACTION ANALYSIS

Star Videos, Inc. Transaction Analysis For the Year Ended December 31
	Cash	Accounts Receivable	Raw Materials	Videos in Process	Finished Videos	Manufacturing Overhead	Prepaid Insurance	Studio Equipment (net)	=	Accounts Payable	Retained Earnings
Beginning balance at 1/1	84,600	103,600	52,800	48,000	80,200	0	8,850	541,000	=	169,000	750,050
a) Raw material purchases			183,000						=	183,000
b) Raw materials used			-226,000	192,100		33,900			=
c) Utility costs						84,000			=	84,000.
d) Depreciation charges						77,100		-102,800	=		-25,700
e) Advertising									=	150,500	-150,500
f) Salaries & wages	-279,900			95,200		74,500			=		-110,200
g) Prepaid insurance						5,075	-7,250		=		-2,175
h) Miscellaneous marketing									=	13,950	-13,950
i) Applied overhead				290,000		-290,000			=
j) Transfer completed videos to finished goods				-572,000	572,000				=
k) Sales		1,032,000							=		1,032,000
l) Transfer finished goods to cost of goods sold					-617,490				=		-617,490
m) Cash collections from customers	982,000	-982,000							=
n) Payment to suppliers	-571,000								=	-571,000
o) Overapplied overhead						15,425			=		15,425
Ending balances at 12/31	215,700	153,600	9,800	53,300	34,710	0	1,600	438,200	=	29,450	877,460

(2.) Schedule of Cost of Goods Manufactured

Star Videos, Inc. Schedule of Cost of Goods Manufactured For the Year Ended December 31
Beginning raw materials inventory $	52,800
Add: Raw material purchases	183,200
Raw materials available for use	236,000
Less: Ending raw materials inventory	(9,800)
Raw materials used	226,200
Less: Indirect materials	(33,900)	192,300
Direct labor		95,200
Manufacturing overhead		290,000
Total manufacturing costs		577,500
Add: Beginning videos in process inventory		48,000
Total videos in process inventory		625,500
Less: Ending videos in process inventory		(53,300)
Cost of goods manufactured		572,200

(3.) Schedule of Cost of Goods Sold

Star Videos, Inc. Schedule of Cost of Goods Sold For the Year Ended December 31
Cost of goods manufactured	572,200
Add: Beginning finished goods inventory	80,200
Cost of goods available for sale	652,400
Less: Ending finished goods inventory	(34,710)
Cost of goods sold	617,690
Less: Overapplied overhead	(15,425)
Adjusted cost of goods sold $	602,265

(4.) Income Statement

Star Videos, Inc. Income Statement For the Year Ended December 31
Sales revenue	1,032,000
Less: Adjusted Cost of goods sold	(602,265)
Gross profit	429,735
Less: Operating expenses:
Salaries and Wages	(110,200)
Depreciation	(25,700)
Marketing and Administrative	(13,950)
Prepaid Insurance	(2,175)
Net income $	277,710

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