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 2018 follow:

Raw Materials Inventory	$	15,600
Work in Process Inventory		5,200
Finished Goods Inventory		20,400

The following transactions occurred during January:

(a) Purchased materials on account for $27,200.
(b) Issued materials to production totaling $20,800, 90 percent of which was traced to specific jobs and the remainder of which was treated as indirect materials.
(c) Payroll costs totaling $18,100 were recorded as follows:
    $10,800 for assembly workers
     2,500 for factory supervision
     2,300 for administrative personnel
      2,500 for sales commissions
(d) Recorded depreciation: $5,700 for factory machines, $700 for the copier used in the administrative office.
(e) Recorded $1,200 of expired insurance. Forty percent was insurance on the manufacturing facility, with the remainder classified as an administrative expense.
(f) Paid $5,600 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 the uncompleted job shows $2,600 for direct materials, $2,100 for direct labor, and $4,200 for applied overhead.
(i) Sold jobs costing $50,800. The revenue earned on these jobs was $66,040.

Required:
1. Set up T-accounts, record the beginning balances, post the January transactions, and compute the final balance for the following accounts:

1. Raw Materials Inventory.
2. Work in Process Inventory.
3. Finished Goods Inventory.
4. Cost of Goods Sold.
5. Manufacturing Overhead.
6. Selling, General, and Administrative Expenses.
7. Sales Revenue.

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.

Raw Material Inventory					Work in Process Inventory
Beg Bal	$   15,600.00				Beg Bal	$     5,200.00
a	$   27,200.00	$   20,800.00	b		b	$   18,720.00	$   47,420.00	h
					c	$   10,800.00
					g	$   21,600.00
End Bal	$   22,000.00				End Bal	$     8,900.00
Finished Goods Inventory					Cost of Goods Sold
Beg Bal	$   20,400.00				Beg Bal
h	$   47,420.00	$   50,800.00	i		i.	$   50,800.00
End Bal	$   17,020.00				End Bal	$   50,800.00
Manufacturing Overhead					Selling, General, and Administrative Expenses
Beg Bal					Beg Bal
b	$     2,080.00	$   21,600.00	g		c	$     2,300.00
c	$     2,500.00				c	$     2,500.00
d	$     5,700.00				d	$        700.00
e	$        480.00				e	$        720.00
f	$     5,600.00
End Bal		$     5,240.00			End Bal	$     3,920.00
Sales Revenue
			Beg Bal
		$   66,040.00	i
		$   66,040.00	End Bal

2.

Income Statement
Sales Revenue	$   66,040.00
Cost of Goods Sold	$   50,800.00
Gross Profit	$   15,240.00
Selling, General and administrative expenses	$     3,920.00
Net Income	$   11,320.00

3. Actual overhead = $2080+2500+5700+480+5600 = $16360
Over (Under) applied overhead = $21600 - $16360 = $5240

4.

Income Statement
Sales Revenue	$   66,040.00
Cost of Goods Sold	$   45,560.00	=50800-5240
Gross Profit	$   20,480.00