Question

On January 1, 2020, John Smith launched a computer services company, Technology Business Solutions that is organized as a corporation and provides computer consulting services and computer system installations. Smith adopts the calendar year for reporting purposes. After the initial success of the company, John Smith continues to operate Technology Business Solutions and has expanded into computer systems manufacturing and sales. They are currently contracting with several large businesses to develop and construct their IT systems. They are several months into the planning and production of these systems and the information for the current month is as follows: Beginning balance Ending balance Raw materials Work in process Finished goods $19,000 $32,000 $46,500 $8,000 $30,351 $54,275 The company applies overhead to jobs using a predetermined overhead rate based on direct labor hours. At the beginning of the year, the company estimated that it would work 51,000 direct labor hours and incur $351,000 in manufacturing overhead cost. The following transactions were recorded for the current month: 1. Raw materials were purchased on account in the amount of $87,000. 2. Raw materials requisitioned for use in production totaled $98,000 ($86,000 direct and $12,000 indirect). 3. The following employee costs were incurred: direct labor was $77,000; indirect labor was $21,000; and executive salaries were $42,000. 4. Selling costs, consisting of commissions for a contracted sales staff and advertising, were incurred in the amount of $44,000. 5. Utility costs were incurred in the amount of $11,400, $5,900 of which was for the factory and the rest for the administrative offices. 6. Depreciation for the month was $28,000 of which $22,000 is related to factory operations and the rest is related to selling and administrative activities. 7. Manufacturing overhead was applied to jobs. The actual level of activity for this month was 2,285 direct labor hours. 8. Sales for the month on account totaled $334,000. Required: a. Identify one example of the following cost classifications for this company: 1. Direct Material 2. Direct Labor 3. Indirect Material

Answer 1

Solutions:

a)

Direct Materials	Raw Materials purchased on account $87000
Direct Labor	Direct labor of $77,000
Indirect Material	Indirect Material of $12000
Indirect Labor	Indirect Labor of $ 12,000
Manufacturing Overhead	Depreciation of $22000 relating to factory operations

b)

Predetermined Overhead Rate

Estimated Overhead Cost / Estimated Labor hours

= 351000 / 51000

$                                                                       6.88

Journal Entries - Technology Business Services
Date	Particulars	Debit	Credit
1	Raw Materials	87000
	Accounts Payable		87000
	(Purchased Raw materials on account)
2	Work In Process	86000
	Manufacturing Overhead	12000
	Raw Materials		98000
	(Requisioned Direct and Indirect Materials)
3	Work in Process	77000
	Manufacturing Overhead	21000
	Salaries Expense	42000
	Salaries and Wages Payable		140000
	(To record employee costs)
4	Sales Commision	44000
	Salaries and Wages Payable		44000
	(To record the Sales commision payable)
5	Manufacturing Overhead	5900
	Utility Expense	5500
	Accounts Payable		11400
	( To record Utilities cost)
6	Manufacturing Overhead	22000
	Depreciation Expense	6000
	Accumulated Depreciation		28000
	(To Record depreciation expense on factory and selling and administrative expense)
7	Work in Process	15720.8
	Manufacturing Overhead		$15,720.80
	(Manufacturing overhead applied @ 2285 hours * 6.88per hour)
8	Accounts Receivable	334000
	Sales		334000
	(Sold Completed table to customer)
Closing Entries
9	Finished Goods	180370
	Work in Process		180370
	(To record the cost of finished goods)
10	Cost of Goods Sold	172595
	Finished Inventory		172595
	(To record cost of goods sold to finished goods inventory)
11	Cost of Goods Sold	45179
	Manufacturing Overhead		45179
	(To record underapplied overhead to cost of goods sold)

c)

Raw Materials				Accounts payable
Bal	19000
1)	87000	2)	98000			1)	87000
Bal	8000					4)	11400
Work In Process				Manufacturing Overheads
Bal	32000
2)	86000	9)	180370	2)	12000	7)	15721
3)	77000			3)	21000	11)	45179
7)	15721			5)	5900
Bal	30351			6)	22000
Salaries Expense				Salaries and Wages Payable
3)	42000					3)	140000
						4)	44000
Accumulated Depreciation				Depreciation Expense
		6)	28000	5)	6000
Accounts Receivable				Sales
8)	334000					8)	334000
Finished Goods				Cost of Goods Sold
Bal	46500	10)	172595	10)	172595
				11)	45179
9)	180370
Bal	54275

d)

Cost of Goods Manufactured Schedule
Work in process, Opening Balance		32000
Direct materials used	86,000
Direct labor	77,000
Manufacturing overhead applied	15,721
Total manufacturing costs		178,721
Total cost of work in process		210,721
Less: Work in process, Closing Balance		30,351
Cost of goods manufactured		$180,370