Question

Christopher’s Custom Cabinet Company uses a job order cost system with overhead applied as a percentage of direct labor costs. Inventory balances at the beginning of 2016 follow:

Raw Materials Inventory	$	16,900
Work in Process Inventory		6,700
Finished Goods Inventory		20,800

The following transactions occurred during January:
(a) Purchased materials on account for $26,900.
(b) Issued materials to production totaling $21,900, 90 percent of which was traced to specific jobs and the remainder of which was treated as indirect materials.
(c) Payroll costs totaling $18,800 were recorded as follows:
    $10,800 for assembly workers
     2,100 for factory supervision
     2,900 for administrative personnel
      3,000 for sales commissions
(d) Recorded depreciation: $4,200 for machines, $900 for the copier used in the administrative office.
(e) Recorded $1,100 of expired insurance. Forty percent was insurance on the manufacturing facility, with the remainder classified as an administrative expense.
(f) Paid $4,600 in other factory costs in cash.
(g) Applied manufacturing overhead at a rate of 200 percent of direct labor cost.
(h) Completed all jobs but one; the job cost sheet for this job shows $2,400 for direct materials, $2,000 for direct labor, and $4,000 for applied overhead.
(i) Sold jobs costing $50,500. The revenue earned on these jobs was $65,650.

Required:
1. Set up T-accounts, record the beginning balances, post the January transactions, and compute the final balance for the following accounts: (Post all amounts separately. Do not combine/add any dollar amounts when posting to the t-accounts.)

1. Raw Materials Inventory.
2. Work in Process Inventory.
3. Finished Goods Inventory.
4. Cost of Goods Sold.
5. Selling, General, and Administrative Expenses.
6. Sales Revenue.
7. Other accounts (Cash, Payables, etc.).

2. Determine how much gross profit the company would report during the month of January before any adjustment is made for the overhead balance.



3. Determine the amount of over- or underapplied overhead.



4. Compute adjusted gross profit assuming that any over- or underapplied overhead balance is adjusted directly to Cost of Goods Sold.

Answer 1

1. T-accounts
Raw Material Inventory					Work in Process Inventory
Details	Debit	Details	Credit		Details	Debit	Details	Credit
Beg. Bal	$16,900.00	Issued	$21,900.00		Beg. Bal	$6,700.00	Completed Jobs	$50,410.00
Purchase	$26,900.00				Direct Material	$19,710.00
					Direct Labor	$10,800.00
					Overheads	$21,600.00
Ending Bal.	$21,900.00				Ending Bal.	$8,400.00
Finished Goods Inventory					Cost of goods sold
Details	Debit	Details	Credit		Details	Debit	Details	Credit
Beg. Bal	$20,800.00	COGS	$50,500.00		Inventory	$50,500.00
Completed jobs	$50,410.00
Ending Bal.	$20,710.00				Ending Bal.	$50,500.00
Selling, General and Administrative expenses					Sales Revenue
Details	Debit	Details	Credit		Details	Debit	Details	Credit
Administrative Salary	$2,900.00						Sales	$65,650.00
Sales Commission	$3,000.00
Depreciation	$900.00
Insurance	$660.00
Ending Bal.	$7,460.00				Ending Bal.			$65,650.00
Accounts Payable					Manufacturing Overheads
Details	Debit	Details	Credit		Details	Debit	Details	Credit
		Raw material	$26,900.00		Indirect Material	$2,190.00
					Indirect labor	$2,100.00
					Depreciation	$4,200.00
					Insurance	$440.00
					Other Factory cost	$4,600.00
Ending Bal.			$26,900.00		Ending Bal.	$13,530.00
Cash
Details	Debit	Details	Credit
Sales	$65,650	Payroll	$18,800.00
		Factory cost	$4,600.00
Ending Bal.	$42,250.00
2. Gross Profit
Sales Revenue	$65,650
Cost of goods sold	$50,500
Gross Profit	$15,150
3. The amount of over or under applied overhead.
Overhead Applied to finished goods	$17,600
Actual overheads	$13,530
Over applied	$4,070
4. Adjusted Gross Profit assuming over-applied overhead balance is adjusted directly to COGS
Sales Revenue		$65,650
Cost of goods sold	$50,500
Less: Overapplied overheads	($4,070)
Adjusted COGS		$46,430
Adjusted Gross Profit		$19,220