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 $399,000 of manufacturing overhead for an estimated allocation base of 1,050 direct labor-hours. The following transactions took place during the year: a. Raw materials purchased on account, $280,000. b. Raw materials used in production (all direct materials), $265,000. c. Utility bills incurred on account, $75,000 (80% related to factory operations, and the remainder related to selling and administrative activities). d. Accrued salary and wage costs: Direct labor (1,100 hours) Indirect labor Selling and administrative salaries $ 310,000 $ 106,000 $ 190,000

Answer 1

1.

Prepare journal entries as follows:

Trn.	General Journal	Debit	Credit
a	Raw material inventory	$280,000
	Accounts payable		$280,000
b	WIP inventory	$265,000
	Raw material inventory		$265,000
c	Manufacturing overhead ($75000 × 80%)	$60,000
	Utility expenses	$15,000
	Accounts payable		$75,000
d	WIP inventory	$310,000
	Manufacturing overhead	$106,000
	Salaries expenses	$190,000
	Wages payable		$606,000
e	Manufacturing overhead	$70,000
	Accounts payable		$70,000
f	Advertisement expense	$152,000
	Accounts payable		$152,000
g	Manufacturing overhead ($88000 × 85%)	$74,800
	Depreciation expense	$13,200
	Accumulated depreciation		$88,000
h	Manufacturing overhead ($113000 × 90%)	$101,700
	Rent expense	$11,300
	Accounts payable		$113,000
i	WIP inventory	$418,000
	Manufacturing overhead		$418,000
	[($399000/1050 direct labor hours) × 1100 hours]
j	Finished goods inventory	$930,000
	WIP inventory		$930,000
k	Accounts receivable	$2,000,000
	Sales		$2,000,000
k.1	COGS	$960,000
	Finished goods inventory		$960,000

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2.

Post your entries to T-accounts as follows:

Raw material Inventory
Beg. Bal.	$46,000	b	$265,000
a	$280,000
End. Bal.	$61,000
WIP inventory
Beg. Bal.	$37,000	j	$930,000
b	$265,000
d	$310,000
i	$418,000
End. Bal.	$100,000
Accounts payable
		a	$280,000
		c	$75,000
		e	$70,000
		f	$152,000
		h	$113,000
		End. Bal.	$690,000
Manufacturing overhead
c	$60,000	i	$418,000
d	$106,000
e	$70,000
g	$74,800
h	$101,700
		End. Bal.	$5,500
Finished goods inventory
Beg. Bal.	$76,000	k.1	$960,000
j	$930,000
End. Bal.	$46,000
COGS
k.1	$960,000
End. Bal.	$960,000
Sales
		k	$2,000,000
		End. Bal.	$2,000,000
Utility expense
c	$15,000
End. Bal.	$15,000
Advertisement expense
f	$152,000
End. Bal.	$152,000
Salaries expense
d	$190,000
End. Bal.	$190,000
Rent expense
h	$11,300
End. Bal.	$11,300
Depreciation expense
g	$13,200
End. Bal.	$13,200
Accumulated Depreciation
		g	$88,000
		End. Bal.	$88,000
Accounts receivable
k	$2,000,000
End. Bal.	$2,000,000
Wages payable
		d	$606,000
		End. Bal.	$606,000

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3.

Prepare a schedule of cost of goods manufactured

Direct Material:		Amount
Raw material inventory, Beginning	$46,000
Add: Purchase of raw material	$280,000
Raw material available	$326,000
Less: Raw material inventory, Ending	($61,000)
Raw material used in production		$265,000
Direct labor		$310,000
Manufacturing overhead applied to WIP		$418,000
Total manufacturing cost		$993,000
Add: WIP inventory, beginning		$37,000
Less: WIP Inventory, Ending		($100,000)
Cost of good manufactured		$930,000

_________________________________________________________________________

4.A

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

General Journal	Debit	Credit
Manufacturing overhead	$5,500
Cost of goods sold		$5,500

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4.B

Prepare a schedule of cost of goods sold

Finished goods inventory, Beginning		$76,000
Add: Cost of goods manufactured		$930,000
Cost of goods available for sale		$1,006,000
Less: Finished goods inventory, Ending		($46,000)
Unadjusted COGS		$960,000
Less: overapplied overhead		($5,500)
Adjusted COGS		$954,500

______________________________________________________________________

5.

Prepare an income statement for the year.

Income Statement
Sales		$2,000,000
Less: COGS		($954,500)
Gross margin		$1,045,500
Selling and admin. Expense:
Utility expense	$15,000
Salary expense	$190,000
Depreciation expense	$13,200
Rent expense	$11,300	$229,500
Net Income		$816,000