Question

Froya Fabrikker A/S of Bergen, Norway, is a small company that manufactures specialty heavy equipment for use in North Sea oil fields. The company uses a job-order costing system that applies manufacturing overhead cost to jobs on the basis of direct labor-hours. Its predetermined overhead rate was based on a cost formula that estimated $380,000 of manufacturing overhead for an estimated allocation base of 1,000 direct labor-hours. The following transactions took place during the year:

Raw materials purchased on account, $220,000. Raw materials used in production (all direct materials), $205,000. Utility bills incurred on account, $63,000 (90% related to factory operations, and the remainder related to selling and administrative activities). Accrued salary and wage costs: Direct labor (1,075 hours) $ 250,000 Indirect labor $ 94,000 Selling and administrative salaries $ 130,000 Maintenance costs incurred on account in the factory, $58,000 Advertising costs incurred on account, $140,000. Depreciation was recorded for the year, $88,000 (85% related to factory equipment, and the remainder related to selling and administrative equipment). Rental cost incurred on account, $113,000 (90% related to factory facilities, and the remainder related to selling and administrative facilities). Manufacturing overhead cost was applied to jobs, $ ? . Cost of goods manufactured for the year, $810,000. Sales for the year (all on account) totaled $1,400,000. These goods cost $840,000 according to their job cost sheets. The balances in the inventory accounts at the beginning of the year were: Raw Materials $ 34,000 Work in Process $ 25,000 Finished Goods $ 64,000 Required:

1. Prepare journal entries to record the preceding transactions.

2. Post your entries to T-accounts. (Don’t forget to enter the beginning inventory balances above.)

3. Prepare a schedule of cost of goods manufactured.

4A. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

4B. Prepare a schedule of cost of goods sold.

5. Prepare an income statement for the year.

Answer 1

Raw materials purchased on account, $220,000
Raw materials	220000
Accounts payable		220000
Raw materials used in production (all direct materials), $205,000
Work-in process	205000
Raw materials		205000
Utility bills incurred on account, $63,000 (90% related to factory operations, and the remainder related to selling and administrative activities)
Manufacturing OH(63000*90%)	56700
Utilities expense	6300
Accounts payable		63000
Accrued salary and wage costs: Direct labor (1,075 hours) $ 250,000 Indirect labor $ 94,000 Selling and administrative salaries $ 130,000
Work-in process	250000
Manufacturing OH	94000
Sell. & admn. Salaries	130000
Salaries & wages payable		474000
Maintenance costs incurred on account in the factory, $58,000
Manufacturing OH	58000
Accounts payable		58000
Advertising costs incurred on account, $140,000
Advertising expenses	140000
Accounts payable		140000
Depreciation was recorded for the year, $88,000 (85% related to factory equipment, and the remainder related to selling and administrative equipment)
Manufacturing OH(88000*85%)	74800
Depreciation expense	13200
Accumulated depreciation		88000
Rental cost incurred on account, $113,000 (90% related to factory facilities, and the remainder related to selling and administrative facilities)
Manufacturing OH(113000*90%)	101700
Rent Expense	11300
Cash		113000
Manufacturing overhead cost was applied to jobs at $ 380000/1000 hrs.=$ 380/hr.
Work-in process	408500
Manufacturing OH(1075*380)		408500
Cost of goods manufactured for the year, $810,000
Finished goods	810000
Work-in process		810000
Sales for the year (all on account) totaled $1,400,000.
Accounts recivable	1400000
Sales Revenue		1400000
These goods cost $840,000 according to their job cost sheets
COGS	840000
Finished goods		840000
	4819500	4819500

			Net Ledger balances
LEDGER ACCOUNTS	Debit	Credit	Debit	Credit
Accounts payable		220000
Accounts payable		63000
Accounts payable		58000
Accounts payable		140000		481000
Accounts recivable	1400000		1400000
Accumulated depreciation		88000		88000
Advertising expenses	140000		140000
Cash		113000		113000
COGS	840000		840000
Depreciation expense	13200		13200
Beginning balance	64000
Finished goods	810000
Finished goods		840000	34000
Manufacturing OH	94000
Manufacturing OH	58000
Manufacturing OH(1075*380)		408500
Manufacturing OH(113000*90%)	101700
Manufacturing OH(63000*90%)	56700
Manufacturing OH(88000*85%)	74800			23300
Beginning balance	34000
Raw materials	220000
Raw materials		205000	49000
Rent Expense	11300		11300
Salaries & wages payable		474000		474000
Sales Revenue		1400000		1400000
Sell. & admn. Salaries	130000		130000
Utilities expense	6300		6300
Beginning balance	25000
Work-in process		810000
Work-in process	205000
Work-in process	250000
Work-in process	408500		78500
	4942500	4819500	2702300	2579300
Difference in beg. Bal.		123000		123000

3..Schedule of
Cost of goods manufactured
Beginning raw materials	34000
Add: Purchases	220000
Less:Ending Raw materials	-49000
Raw materials consumed		205000
Direct labor(1075 hrs.*$ 380)		250000
Mfg. OH applied(1075*380)		408500
Total manufacturing costs		863500
Add: Beginning WIP		25000
Less: Ending WIP		-78500
Cost of goods manufactured		810000
4A.
Manufacturing OH	23300
COGS		23300
(Over-applied mfg.OH( reduced from )charged to COGS)
4 B.Schedule of
Cost of goods Sold
Beginning Finished goods	64000
Add: Cost of goods manufactured	810000
Cost of goods available for sale		874000
Less: Ending finished goods		-34000
Cost of goods sold before adjustment		840000
Less: Adj. for mfg. OH over-applied		-23300
Adjusted COGS		816700
5. Income statement for the year
Sales Revenue		1400000
Less: COGS		-816700
Gross profit		583300
Less: Operating Expenses:
Advertising expenses	140000
Depreciation expense	13200
Rent Expense	11300
Sell. & admn. Salaries	130000
Utilities expense	6300
Total Operating expenses		-300800
Net Income		282500