Question

Benning Inc is a defense contractor that uses job costing. Because the firm uses a perpetual inventory system, the 3 supporting schedules to the income statement (the schedule of raw materials placed in production, the schedule of cost of goods manufactured and the schedule of cost of good sold) are NOT necessary. Inventory account beginning balances at January 1,2012 are listed as follows:

Raw Materials Inventory - $500,000

Work in Process Inventory - $ 700,000

Finished good inventory - $1,800,000

You will be recording the following transactions, which summarize the activities that occurred during the year ended December 31, 2012.

1. Raw materials were purchased for $300,000 on account
2. Raw materials totaling $420,000 were placed in production, $60,000 for indirect materials and $360,000 for direct materials
3. The raw materials purchased in transaction 1 were paid for
4. A total cost of $800,000 for direct labor, shown on the timesheets, was recorded as wages payable
5. Production supervisors and other indirect labor working in the factory were owed $540,000, recorded as wages payable
6. Wages owed, totaling $1,200,000 were paid (These wages were previously recorded correctly as wages payable.)
7. The costs listed in the following related to the factory were incurred during the period (HINT: Record these items in one entry with one debit to manufacturing overhead and 4 separate credits)
   Building Depreciation - $580,000
   Insurance (prepaid during 2012, now expired) - $220,000
   Utilities (on account) - $80,000
   Maintenance ( Paid Cash) - $440,000
8. Manufacturing overhead was applied at a rate of $20 per machine hour and 90,000 machine hours were utilized during the year (HINT: no need to calculate the predetermined overhead rate since it is already given to you here)
9. Misc selling costs totaling $430,000 were paid. These costs were recorded in an account called selling expenses
10. Misc general and admin costs totaling $265,000 were paid. These costs were recorded in an account called G&A expenses
11. Goods costing $2,030,000 9per the job cost sheets) were completed and transferred out of work-in-process inventory
12. Goods sold on account for $3,800,000
13. The good sold in transaction 12 had a cost of $2,570,000 (per the job cost sheets)
14. Payments totaling $3,300,000 from credit customers related to transaction 12 were received.

1. Prepare an income statement for the year ended Dec 31, 2012. Remember to adjust cost of goods sold for any underapplied or overapplied overhead. Why is cost of goods sold adjusted upward on the income statement?

Answer 1