Question

Exercise 7-22 (Algo) Assigning Costs to Jobs (LO 7-1, 2) The following transactions occurred in April at Steve's Cabinets, a custom cabinet firm. 1. Purchased $22.500 of materials on account. 2. Issued $1,450 of supplies from the materials inventory. 3. Purchased $12,500 of materials on account. 4. Paid for the materials purchased in transaction (1) using cash. 5. Issued $14,900 in direct materials to the production department. 6. Incurred direct labor costs of $26,500, which were credited to Wages Payable. 7. Paid $22,500 cash for utilities, power, equipment maintenance, and other miscellaneous items for the manufacturing plant. 8. Applied overhead on the basis of 130 percent of $26,500 direct labor costs. 9. Recognized depreciation on manufacturing property, plant, and equipment of $11,300. The following balances appeared in the accounts of Steve's Cabinets for April. Materials Inventory Work-in-Process Inventory Finished Goods Inventory Cost of Goods Sold Beginning Ending $31,590 7,900 ? 34,500 $29,290 54,630 Required: a. Prepare journal entries to record the transactions. b. Prepare T-accounts to show the flow of costs during the period from Materials Inventory through Cost of Goods Sold.

Answer 1

Understanding of the Process:

In costing of a manufacturing concern, the process flow is as follows:

1. Materials are purchased either on cash or credit;

2. The direct materials purchased, labour incurred, overhead applied will be done in Production department which we call as Work-in-process accounting.

3. Finished goods from the production will be transferred to Finished Goods.

4. Finished goods ready for sale are sent to Cost of Goods Sold.

5. Any over or under applied overhead will be dealt in Cost of Goods Sold Account.

Lets answer the questions given:

a. The following are the journal entries for the transactions listed along with the narration:

Credit Debit $ 22,500 $ 22,500 $ 1,450 $ 1,450 $ 12,500 $ 12,500 $ 22,500 $ 22,500 $ 14,900 $ 14,900 S.No. Account Titles and Explanation 1 Materials Inventory Accounts Payable [Materials purchased on credit basis] 2 Work-in-Process inventory Materials Inventory [As materials costing $1,450 is issued to production] 3 Materials Inventory Accounts Payable [Materials purchased on credit basis] 4 Accounts Payable Cash [As cash paid for the credit purchases made at the beginning) 5 Work-in-Process inventory Materials Inventory [As materials costing $1,450 is issued to production] 6 Work-in-Process inventory Wages Payable [As wages expense incurred and wages payable is credited] 7 Manufacturing overhead Cash [As cash paid for actual overhead incurred] 8 Work-in-Process inventory Manufacturing overhead [As manufacturing overhead applied based on the predetermined overhead rate) 9 Depreciation Accumulated Depreciation [As depreciation is calculated on Property, Plant and Equipment] $ 26,500 $ 26,500 $ 22,500 $ 22,500 $ 34,450 $ 34,450 $ 11,300 $ 11,300

The entries are explained, in case of any doubts, feel free to reach us.

b. The T-Accounts to show the flow of costs during the period from Materials Inventory through Cost of Goods Sold are as follows:

$ $ $ Materials Inventory 31,590 Opening Balance 22,500 Materials Purchase Sent to Production 12,500 Materials Purchase Sent to Production Closing Balance $ 1,450 $ 14,900 $ 50,240 $ 66,590 $ 66,590

$ 61,370 $ $ $ $ Work-in-Process inventory 7,900 Opening Balance Finished Goods 1,450 Received from Materials 14,900 Received from Materials 26,500 Direct Labor Manufacturing Overhead 34,450 Applied Closing Balance $ $ 23,830 $ 85,200 $ 85,200

$ 34,500 Finished Goods Inventory Opening Balance Cost of Goods Sold $ 66,580 $ 61,370 Received from Production Closing Balance $ 29,290 $ 95,870 $ 95,870

Finished Goods ready for sale $ Cost of Goods Sold 66,580 Overapplied Overhead $ 11,950 Closing Balance $ 54,630 66,580 $ 66,580

Manufacturing Overhead Applied Overhead $ 34,450 $ $ 22,500 Actual Overhead 11,950 Overapplied $ 34,450 $ 34,450

Accounts Payable $ $ 22,500 Payment made 12,500 Closing Balance Materials Purchased Materials Purchased $ 22,500 $ 12,500 $ 35,000 $ 35,000

Wages Payable Wages incurred $ 26,500 26,500 Closing Balance 26,500 $ 26,500

Cash Payment made towards Account $ Payment made towards Overhea $ 22,500 22,500

Ending balances of Materials Inventory and Work-in-Process Inventory are $50,240 and $23,830 respectively.