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 $372,000 of manufacturing overhead for an estimated allocation base of 1,200 direct labor-hours. The following transactions took place during the year:

1. Raw materials purchased on account, $240,000.
2. Raw materials used in production (all direct materials), $225,000.
3. Utility bills incurred on account, $67,000 (95% related to factory operations, and the remainder related to selling and administrative activities).
4. Accrued salary and wage costs:

Direct labor (1,275 hours)	$	270,000
Indirect labor	$	98,000
Selling and administrative salaries	$	150,000

5. Maintenance costs incurred on account in the factory, $62,000
6. Advertising costs incurred on account, $144,000.
7. Depreciation was recorded for the year, $80,000 (85% related to factory equipment, and the remainder related to selling and administrative equipment).
8. Rental cost incurred on account, $105,000 (90% related to factory facilities, and the remainder related to selling and administrative facilities).
9. Manufacturing overhead cost was applied to jobs, $ ? .
10. Cost of goods manufactured for the year, $850,000.
11. Sales for the year (all on account) totaled $1,600,000. These goods cost $880,000 according to their job cost sheets.

The balances in the inventory accounts at the beginning of the year were:

Raw Materials	$	38,000
Work in Process	$	29,000
Finished Goods	$	68,000

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

Predetermined overhead rate = $ 372,000 / 1,200 = $ 310 per direct labor hour.

1. In the books of Froya Fabrikker, A/S:

Transaction / Event	Account Titles	Debit	Credit
		$	$
1.	Raw Materials Inventory	240,000
	Accounts Payable		240,000
2.	Work in Process Inventory	225,000
	Raw Materials Inventory		225,000
3.	Manufacturing Overhead	63,650
	Utilities Expense	3,350
	Accounts Payable		67,000
4.	Work in Process Inventory	270,000
	Manufacturing Overhead	98,000
	Selling and Administration Salaries Expense	150,000
	Salaries and Wages Payable		518,000
5.	Manufacturing Overhead	62,000
	Accounts Payable		62,000
6.	Advertising Expense	144,000
	Accounts Payable		144,000
7.	Manufacturing Overhead	68,000
	Depreciation Expense	12,000
	Accumulated Depreciation		80,000
8.	Manufacturing Overhead	94,500
	Rent Expense	10,500
	Accounts Payable		105,000
9.	Work in Process Inventory ( 1,275 x $ 310)	395,250
	Manufacturing Overhead		395,250
10.	Finished Goods Inventory	850,000
	Work in Process Inventory		850,000
11.a.	Accounts Receivable	1,600,000
	Sales		1,600,000
11.b.	Cost of Goods Sold	880,000
	Finished Goods Inventory		880,000

2. Raw Materials Inventory:

Beginning Inventory	$ 38,000	Work in Process Inventory	225,000
Accounts Payable	240,000
Ending Inventory	53,000

Work in Process Inventory:

Beginning Inventory	29,000	Finished Goods Inventory	850,000
Raw Materials Inventory	225,000
Salaries and Wages Payable	270,000
Manufacturing Overhead	395,250
Ending Balance	69,250

Finished Goods Inventory:

Beginning Balance	68,000	Cost of Goods Sold	880,000
Work in Process Inventory	850,000
Ending Balance	38,000

Manufacturing Overhead :

Salaries and Wages Payable	98,000	Work in Process Inventory	395,250
Accounts Payable	63,650
Accounts Payable	62,000
Accumulated Depreciation	68,000
Accounts Payable	94,500
Cost of Goods Sold	9,100

3.

Froya Fabrikker S/A Schedule of Cost of Goods Manufactured For the year ended......
Beginning Work in Process Inventory	$	$ 29,000
Add: Raw materials consumed
Beginning raw materials inventory	38,000
Add: Purchases	240,000
Less: Ending raw materials inventory	(53,000)	225,000
Direct Labor		270,000
Manufacturing Overhead Applied		395,250
Total Cost of Work in Process		919,250
Less: Ending Work in Process Inventory		69,250
Cost of Goods Manufactured		850,000

4A.

	Debit	Credit
	$	$
Manufacturing Overhead	9,100
Cost of Goods Sold		9,100

4B.

Froya Fabrikker S/A Schedule of Cost of Goods Sold For the year ended.....
Beginning Finished Goods Inventory	$ 68,000
Add: Cost of Goods Manufactured	850,000
Cost of Goods Available for Sale	918,000
Less: Ending Finished Goods Inventory	38,000
Cost of Goods Sold ( Unadjusted)	880,000
Less: Overapplied Manufacturing Overhead	9,100
Cost of Goods Sold ( Adjusted )	$ 870,900

5.

Froya Fabrikker S/A Income Statement For the year ended............
Sales		1,600,000
Cost of Goods Sold		870,900
Gross Margin		729,100
Selling and Administrative Expenses
Salaries Expense	150,000
Advertising Expense	144,000
Utilities Expense	3,350
Rent Expense	10,500
Depreciation Expense	12,000
Total Selling and Administrative Expenses		319,850
Net Operating Income		409,250