Question

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

Star Videos, Inc.
Balance Sheet
January 1
Assets
Cash				$	74,600
Accounts receivable					115,400
Inventories:
Raw materials (film, costumes)	$	10,000
Videos in process		49,000
Finished videos awaiting sale		88,600			147,600
Prepaid insurance					8,200
Studio and equipment (net)					588,000
Total assets				$	933,800
Liabilities and Stockholders’ Equity
Accounts payable				$	244,000
Retained earnings					689,800
Total liabilities and stockholders’ equity				$	933,800

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 ($40 per camera-hour) is based on a cost formula that estimated $280,000 in manufacturing overhead for an estimated allocation base of 7,000 camera-hours. Any underapplied or overapplied overhead is closed to cost of goods sold. The following transactions were recorded for the year:

1. Film, costumes, and similar raw materials purchased on account, $210,500.
2. Film, costumes, and other raw materials issued to production, $215,500 (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, $94,800.
4. Depreciation recorded on the studio, cameras, and other equipment, $85,200. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration.
5. Advertising expense incurred (on account), $174,000.
6. Salaries and wages paid in cash as follows:

Direct labor (actors and directors)	$	91,200
Indirect labor (carpenters to build sets, costume designers, and so forth)	$	91,500
Administrative salaries	$	108,800

7. Prepaid insurance expired during the year, $7,300 (70% related to production of videos, and 30% related to marketing and administrative activities).
8. Miscellaneous marketing and administrative expenses incurred (on account), $13,550.
9. Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year.
10. Videos that cost $518,000 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 $1,126,000 and were all on account.
12. The total cost to produce the videos that were sold according to their job cost sheets was $559,710.
13. Collections from customers during the year totaled $1,076,000.
14. Payments to suppliers on account during the year, $605,000.
15. Underapplied or overapplied overhead $__?__.

Required:

1. Prepare a transaction analysis that records all of the above transactions.

2. Prepare a schedule of cost of goods manufactured for the year.

3. Prepare a schedule of cost of goods sold for the year.

4. Prepare an income statement for the year.

Answer 1

1)
Date	Acc Titles	Debit $	Credit $
a	Materials	210500
	Accounts Payable		210500
	(materials purchased on credit)
b	WIP Inventory	183175
	Manufacturing overhead	32325
	Materials		215500
	(being material applied to production)
c	Manufacturing overhead	94800
	Accounts Payable		94800
	(utility incurred)
d	Manufacturing ovehead	63900
	Admin & Selling Expenses	21300
	Depreciation		85200
	(depreciation expenses recorded)
e	Admin & Selling Expenses	174000
	Accounts Payable		174000
	(advertising expense incurred)
f	WIP Inventory	91200
	Manufacturing ovehead	91500
	Admin & Selling Expenses	108800
	Payroll Expenses		291500
	(payroll expenses incurred)
g	Manufacturing ovehead	5110
	Admin & Selling Expenses	2190
	Prepaid Insurance		7300
	(insurance expenses expired)
h	Admin & Selling Expenses	13550
	Accounts Payable		13550
	(misc. expenses incurred on credit)
i	WIP Inventory	290000
	Manufacturing ovehead		290000
	(overhead applied to WIP)
J	FG Inventory	518000
	WIP Inventory		518000
	(FG transferred from WIP)
k	Accounts Receivable	1126000
	Sales		1126000
	(being credit sales recorded)
l	COGS	559710
	FG Inventory		559710
	(Cost of sales recorded)
m	Cash	1076000
	Accounts Receivable		1076000
	(collection from debtors)
n	Accounts Payable	605000
	Cash		605000
	(payment to creditors)

2)Cost of goods manufactured :
		Amount$
WIP Opening		49000
Material used	183175
Direct Lab.	91200
Overhead applied	290000
Manufacturing expenses		564375
Total WIP		613375
WIP Closing		95375
Cost of Goods Manufactured		518000
3)Cost of goods sold :
	Amount$
Finished Goods Op Bal.	88600
Add:COGM	518000
Total available for sale	606600
Less:FG Cl. Bal.	46890
cost of goods sold	559710
4)income statement
	Amount$
Sales	1126000
Less:COGS	559710
Gross Profit	566290
Admin & Selling exp.:
dep	21300
advertising	174000
salaries	108800
Insu	2190
Misc exp.	13550
Total Admin & Selling exp.	319840
Net Operating Income	246450
Under/Over-Applied Overhead:
Actual Overhead Incurred:
Ind mat.	32325
Utility	94800
Dep	63900
Ind lab.	91500
Insurance	5110
Actual Overhead Incurred:	287635
Applied Overhead to WIP	290000
Over-applied overhead	2365