Question

Problem 3-17 Cost Flows; T-Accounts; Income Statement [LO3-2, LO3-3, LO3-4]

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

Supreme Videos, Inc. Balance Sheet January 1
Assets
Current assets:
Cash				$	75,000
Accounts receivable					114,000
Inventories:
Raw materials (film, costumes)	$	42,000
Videos in process		20,000
Finished videos awaiting sale		93,000			155,000
Prepaid insurance					11,400
Total current assets					355,400
Studio and equipment		754,000
Less accumulated depreciation		222,000			532,000
Total assets				$	887,400
Liabilities and Stockholders' Equity
Accounts payable				$	104,400
Capital stock	$	501,000
Retained earnings		282,000			783,000
Total liabilities and stockholders' equity				$	887,400

  

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 is based on a cost formula that estimated $360,000 in manufacturing overhead for an estimated allocation base of 9,000 camera-hours. The following transactions occurred during the year:

1. Film, costumes, and similar raw materials purchased on account, $197,000.
2. Film, costumes, and other raw materials used in production, $212,000 (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, $96,000. Three-fourths of this depreciation related to production of the videos, and the remainder related to equipment used in marketing and administration.
5. Advertising expense incurred on account, $142,000.
6. Costs for salaries and wages were incurred on account as follows:

Direct labor (actors and directors)	$	94,000
Indirect labor (carpenters to build sets, costume designers, and so forth)	$	122,000
Administrative salaries	$	107,000

7. Prepaid insurance expired during the year, $8,200 (80% related to production of videos, and 20% related to marketing and administrative activities).
8. Miscellaneous marketing and administrative expenses incurred on account, $9,800.
9. Studio (manufacturing) overhead was applied to videos in production. The company used 9,100 camera-hours during the year.
10. Videos that cost $562,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.
11. Sales for the year totaled $949,000 and were all on account. The total cost to produce these videos according to their job cost sheets was $612,000.
12. Collections from customers during the year totaled $862,000.
13. Payments to suppliers on account during the year, $512,000; payments to employees for salaries and wages, $303,000.

Required:

1. Prepare a T-account for each account on the company’s balance sheet and enter the beginning balances.

2. Record the transactions directly into the T-accounts. Key your entries to the letters (a) through (m) above.

3. Is the Studio (manufacturing) Overhead account underapplied or overapplied for the year? By how much?

4. Prepare a schedule of cost of goods manufactured.

5. Prepare a schedule of cost of goods sold.

6. Prepare an income statement for the year.

Answer 1

1&2) T-Accounts:
DEBIT	AMOUNT$	CREDIT	AMOUNT$
Cash a/c
OB	75000	m	512000
l	862000	m	303000
		CB	122000
AR a/c
OB	114000	l	862000
k	949000	CB	201000
RM a/c
OB	42000	b	212000
a	197000	CB	27000
Videos in process a/c
OB	20000	j	562000
b	180200	CB	96200	(212000*85%)
f	94000
i	364000
Finished Videos awaiting sale a/c
OB	93000	k	612000
j	562000	CB	43000
Prepaid Insurance a/c
OB	11400	g	8200
		CB	3200
Studio and Equipment a/c
OB	754000
Acc. Depreciation - Stu&Eq a/c
CB	318000	OB	222000
		d	96000
AP a/c
m	512000	OB	104400
CB	25200	a	197000
		c	84000
		e	142000
		h	9800
Salaries & Wages payable a/c
m	303000	f	323000
CB	20000
Capital Stock a/c
		OB	501000
Retained Earnings a/c
		OB	282000
Studio Overhead a/c
b	31800	i	364000	(212000*15%)	(9100*360000/9000)
c	84000
d	72000			(96000*0.75)
f	122000
g	6560			(8200*0.8)
Over-applied	47640
Marketing & Admin exp a/c
d	24000	CB	284440	(96000*0.25)
e	142000
f	107000
g	1640			(8200*0.2)
h	9800
Sales a/c
		k	949000
COGS a/c
k	612000
3) Studio Overhead account has been over-applied by $47640.
4)Schedule of cost of goods manufactured:
WIP OB	20000
Manufacturing cost added:
RM used	180200
DL used	94000
OH applied	364000
Total WIP	658200
Less: WIP CB	96200
Cost of Goods Manufactured	562000
5) Schedule of Cost of Goods Sold:
FG OB	93000
Add:COGM	562000
Total Videos for sale	655000
Less:FG CB	43000
Cost of Goods Sold	612000
6) Income Statement:
Sales	949000
Less:COGS	612000
Gross Profit	337000
Less:Marketing and Selling Exp.:	284440
Net Operating Income	52560