Question

Question 3 (13 marks)

Bergamo Bay Co. uses enterprise resource planning (ERP) system to combine the business activities with accounting activities. ERP system provides an integrated and continuously updated view of core business processes. The system can track business resources, i.e. cash, raw materials, etc., and shares data across various departments (manufacturing, purchasing, sales, accounting, etc.), and various stakeholders of the company. The system also can provide timely information and report to variable users within the company. On December 31, 2019 ERP system generated the following trial balance. The company’s manager knows something is wrong with the trial balance because it does not show any balance for Work in Process Inventory but does show a balance for the Factory Payroll and Factory Overhead account.

		Debit			Credit
Cash	$	67,200
Accounts receivable		58,800
Raw materials inventory		36,400
Work in process inventory		0
Finished goods inventory		12,600
Prepaid rent		4,200
Accounts payable				$	14,700
Notes payable					18,900
Common stock					42,000
Retained earnings					121,800
Sales					252,000
Cost of goods sold Factory payroll		147,000 22,400
Factory overhead		37,800
Operating expenses		63,000
Totals	$	449,400		$	449,400

After examining various files, the manager identifies the following six source documents that need to be processed to bring the accounting records up to date.

Materials requisition 21-3010:	$	6,440	direct materials to Job 402
Materials requisition 21-3011:	$	10,640	direct materials to Job 404
Materials requisition 21-3012:	$	2,940	indirect materials
Labor time ticket 6052:	$	7,000	direct labor to Job 402
Labor time ticket 6053:	$	11,200	direct labor to Job 404
Labor time ticket 6054:	$	4,200	indirect labor

Jobs 402 and 404 are the only units in process at year-end. The predetermined overhead rate is 200% of direct labor cost.

Required: (13 marks)

(1) Prepare journal entries to assign the costs below:
(a) Direct materials costs to Work in Process Inventory. (2 marks)

(b) Direct labor costs to Work in Process Inventory. (2 marks)

(c) Overhead costs to Work in Process Inventory. (2 marks)

(d) Indirect materials costs to the Factory Overhead account. (2 marks)

(e) Indirect labor costs to the Factory Overhead account. (2 marks)

(2) According the entries from part (1) related to factory overhead, determine the amount of under- or overapplied overhead for the year. (1 marks)

(3) Prepare the adjusting entry to allocate any over- or underapplied overhead to Cost of Goods Sold, assuming the amount is not material. (2 marks)

Answer 1

Solution:

Primary Working:

	Job 402	Job 404	Total
Direct Materials	$6,440	$10,640	$17,080
Direct Labor	$7,000	$11,200	$18,200
Applied Ovehreads (200% of direct labor)	$14,000	$22,400	$36,400
Total Costs	$27,440	$44,240	$71,680

Part 1 – Journal Entries

Date	General Journal	Debit	Credit
a)	Work In Process Inventory (Direct)	$17,080
	Raw Materials Inventory		$17,080
	(To assign materials inventory)
b)	Work In Process Inventory (Direct)	$18,200
	Wages Payable		$18,200
	(To assign direct labor costs)
c)	Work In Process Inventory	$36,400
	Factory Overheads Applied		$36,400
	(To apply manufacturing overheads)
d)	Factory Overheads	$2,940
	Raw Materials Inventory		$2,940
	(To assing indirect material cost)
e)	Factory Overheads	$4,200
	Wages Payable		$4,200
	(To record indirect labor)

Part 2 –

Actual Factory Overheads incurred = Indirect materials 2940 + Indirect labor 4200 + Beginning balance 37,800

= $44,940

Applied Factory Overheads (refer primary working) = $36,400

Here, Applied Overheads are less than actual factory overheads incurred. It means the Overheads are UnderApplied.

Under Applied Factory Overheads = $44,940 - $36,400 = $8,540

Part 3 – Adjusting Entry

Date	General Journal	Debit	Credit
a)	Cost of Goods Sold	$8,540
	Factory Overheads (under applied)		$8,540
	(To adjust under applied overheads to Cost of Goods SOld)