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 $395,600 of manufacturing overhead for an estimated allocation base of 920 direct labor-hours. The following transactions took place during the year: a. Raw materials purchased on account, $290,000. b. Raw materials used in production (all direct materials), $275,000. c. Utility bills incurred on account, $77,000 (90% related to factory operations, and the remainder related to selling and administrative activities). d. Accrued salary and wage costs: Direct labor (970 hours) Indirect labor Selling and administrative salaries $ 320,000 $ 108,000 $ 200,000 e. Maintenance costs incurred on account in the factory, $72,000 f. Advertising costs incurred on account, $154,000. g. Depreciation was recorded for the year. $90,000 (75% related to factory equipment, and the remainder related to selling and administrative equipment). h. Rental cost incurred on account, $115,000 (80% related to factory facilities, and the remainder related to selling and administrative facilities). i. Manufacturing overhead cost was applied to jobs, $_?__ j. Cost of goods manufactured for the year, $950,000. k. Sales for the year (all on account) totaled $2,100,000. These goods cost $980,000 according to their job cost sheets. The balances in the inventory accounts at the beginning of the year were:

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

Answer-

Predetermined overhead rate =$395,600 /920 direct labor-hours= $430

1. Journal entries

No.	Account Titles and Explanation	Debit	Credit
a	Raw Material Inventory	290,000
	Accounts Payable		290,000
b	Work in Process Inventory	275,000
	Raw Material Inventory		275,000
c	Manufacturing Overhead	69,300
	Utility Expenses	7,700
	Accounts Payable		77,000
d	Work in Process Inventory	320,000
	Manufacturing Overhead	108,000
	Salaries Expenses	200,000
	Wages Payable		628,000
e	Manufacturing Overhead	72,000
	Accounts Payable		72,000
f	Advertisement Expenses	154,000
	Accounts Payable		154,000
g	Manufacturing Overhead	67,500
	Depreciation Expenses	22,500
	Accumulated Depreciation		90,000
h)	Manufacturing Overhead	92,000
	Rent Expenses	23,000
	Accounts Payable		115,000
i	Work in Process Inventory ($430*970 hrs)	417,100
	Manufacturing Overhead		417,100
J	Finished Good Inventory	950,000
	Work in Process Inventory		950,000
k	Accounts Receivable	2,100,000
	Sale		2,100,000
	(To record the sale )
	Cost of Good Sold	980,000
	Finished Good Inventory		980,000
	(To record the cost of the sale)

2. Posting to T-accounts

Raw Material Inventory					Work in process Inventory					Accounts Payable
Beg	48,000	275,000	b		Beg	39,000	950,000	j				290,000	a
a	290,000				b	275,000						77,000	c
	338,000	275,000			d	320,000						72,000	e
Bal	63,000				i	417,100						154,000	f
												115,000	h
Finished Good Inventory						1,051,100	950,000
Beg	78,000	980,000	k		Bal	101,100						708,000
j	950,000
					Manufacturing Overhead
	1,028,000	980,000			c	69,300	417,100	i
Bal	48,000				d	108,000				Cost of Good Sold
					e	72,000				k	980,000
Utility Expenses					g	67,500
c	7,700				h	92,000					980,000
						408,800	417,100
	7,700						8,300	Bal		Wages Payable
												628,000	d
Advertisement Expenses					Salaries Expenses
f	154,000				d	200,000						628,000
	154,000					200,000				Accumulated Depreciation
												90,000	g
Rent Expenses					Depreciation Expenses
h	23,000				g	22,500						90,000
	23,000					22,500				Sale
												2,100,000	k
					Account receivable
					k	2,100,000						2,100,000
						2,100,000

3. Schedule of cost of goods manufactured

Direct Material
	Raw Material Inventory:Beginning	48,000
	Add: Purchases of Raw Material	290,000
	Raw Material Available	338,000
	Deduct: Raw Material Inventory: Ending	63,000
Raw Material Used in production			275,000
Direct Labor			320,000
Manufacturing Overhead applied to Work in process			417,100
Total Manufacturing Cost			1,012,100
Add:Beginning Work in process Inventory			39,000
			1,051,100
Deduct: Ending Work in process Inventory			101,100
	Cost of Good Manufactured		950,000

4.Journal Entry

Account Titles and Explanation	Debit	Credit
Manufacturing Overhead	8,300
Cost of Good Sold		8,300

The schedules of cost of goods sold
Finished Goods Inventory Beginning		78,000
Add: Cost of Good Manufactured		950,000
Cost of Goods Available for sale		1,028,000
Deduct: Finished Goods Inventory Ending		48,000
Unadjusted Cost of Good Sold		980,000
Less: Overapplied Overhead		8,300
Adjusted Cost of Good Sold		971,700

5.

The Income Statement
Sales			2,100,000
Cost of Good sold			971,700
Gross Margin			1,128,300
Selling and Administrative Expenses
	Utility Expenses	7,700
	Advertisement Expenses	154,000
	Salary Expenses	200,000
	Depreciation Expenses	22,500
	Rent Expenses	23,000	407,200
Net Income			721,100