Question

Froya Fabrikker A/S of Bergen, Norway, is a small company that manufactures specialty heavy equipment for use in North Sea oil fields. The company uses a job-order costing system that applies manufacturing overhead cost to jobs on the basis of direct labor-hours. Its predetermined overhead rate was based on a cost formula that estimated $380,000 of manufacturing overhead for an estimated allocation base of 1,000 direct labor-hours. The following transactions took place during the year:

1. Raw materials purchased on account, $275,000.
2. Raw materials used in production (all direct materials), $260,000.
3. Utility bills incurred on account, $74,000 (95% related to factory operations, and the remainder related to selling and administrative activities).
4. Accrued salary and wage costs:

Direct labor (1,100 hours)	$	305,000
Indirect labor	$	105,000
Selling and administrative salaries	$	185,000

5. Maintenance costs incurred on account in the factory, $69,000
6. Advertising costs incurred on account, $151,000.
7. Depreciation was recorded for the year, $87,000 (80% related to factory equipment, and the remainder related to selling and administrative equipment).
8. Rental cost incurred on account, $112,000 (85% related to factory facilities, and the remainder related to selling and administrative facilities).
9. Manufacturing overhead cost was applied to jobs, $ ? .
10. Cost of goods manufactured for the year, $920,000.
11. Sales for the year (all on account) totaled $1,950,000. These goods cost $950,000 according to their job cost sheets.

The balances in the inventory accounts at the beginning of the year were:

Raw Materials	$	45,000
Work in Process	$	36,000
Finished Goods	$	75,000

Required:

1. Prepare journal entries to record the preceding transactions.

2. Post your entries to T-accounts. (Don’t forget to enter the beginning inventory balances above.)

3. Prepare a schedule of cost of goods manufactured.

4A. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

4B. Prepare a schedule of cost of goods sold.

5. Prepare an income statement for the year.

Answer 1

1) Predetermined overhead rate= Estimated overhead rate/Estimated direct labor hours

= $380000/1000= $380

Manufacturing overhead applied= $380*1100= $418000

Transactions	Accounts titles and explanation	Debit	Credit
1	Raw materials inventory	$275000
	Accounts payable		$275000
	(To record materials purchased on account)
2	Work in process inventory	$260000
	Raw materials inventory		$260000
	(To record direct materials used)
3	Manufacturing overhead (74000*95%)	$70300
	Utilities expense (74000-70300)	$3700
	Accounts payable		$74000
	(To record utilities bill incurred)
4	Work in process inventory	$305000
	Manufacturing overhead	$105000
	Salaries expense	$185000
	Salaries and wages payable		$595000
	(To record accrued salary and wages costs)
5	Manufacturing overhead	$69000
	Accounts payable		$69000
	(To record maintenance costs incurred on account)
6	Advertising expense	$151000
	Accounts payable		$151000
	(To record advertising costs incurred on account)
7	Manufacturing overhead (87000*80%)	$69600
	Depreciation expense (87000*20%)	$17400
	Accumulated depreciation		$87000
	(To record depreciation expenses)
8	Manufacturing overhead (112000*85%)	$95200
	Rent expense (112000-85200)	$16800
	Accounts payable		$112000
	(To record rental cost incurred on account)
9	Work in process inventory	$418000
	Manufacturing overhead		$418000
	(To record manufacturing overhead cost applied)
10	Finished goods inventory	$920000
	Work in process inventory		$920000
	(To record cost of goods manufactured)
11	Accounts receivable	$1950000
	Sales revenue		$1950000
	(To record sales on account)
	Cost of goods sold	$950000
	Finished goods inventory		$950000
	(To record cost of goods sold)

2)

Raw Materials Inventory					Work-in-process Inventory
Beg. bal.	$45000	2	260000		Beg. bal.	$36000	10	920000
1	275000				2	260000
					4	305000
					9	418000
End. bal.	$60000				End. bal.	$99000
Finished Goods Inventory					Manufacturing Overhead
Beg. bal.	$75000	11	950000		3	70300	9	418000
10	920000				4	105000
					5	69000
					7	69600
					8	95200
End. bal.	$45000				End. bal.			$8900
Accounts payable					Cost of Goods Sold
		1	$275000		11	950000
		3	74000
		5	69000
		6	151000
		8	112000
End. bal.			$681000		End. bal.	$950000
Utilities expense					Salaries expense
3	3700				4	185000
End. bal.	$3700				End. bal.	$185000
Salaries and wages payable					Advertising expense
		4	595000		6	151000
End. bal.			$595000		End. bal.	$151000
Depreciation expense					Accumulated depreciation
7	17400						7	87000
End. bal.	$17400				End. bal.			$87000
Rent expense					Accounts receivable
8	16800				11	1950000
End. bal.	$16800				End. bal.	$1950000
Sales revenue
		11	1950000
End. bal.			$1950000

3)

Froya Fabrikker A/S
Schedule of Cost of Goods Manufactured
Direct materials:
Beginning raw materials inventory	$45000
Add: Purchases of raw materials	275000
Raw materials available for use	320000
Less: Ending raw materials inventory	(60000)
Raw materials used in production		260000
Direct labor		305000
Manufacturing overhead applied		418000
Total manufacturing cost		983000
Add: Work in process inventory		36000
		1019000
Less: Ending work in process inventory		(99000)
Cost of goods manufactured		$920000

4-A) Actual manufacturing overhead= $70300+105000+69000+69600+95200= $409100

Overapplied or underapplied= Manufacturing overhead applied-Actual manufacturing overhead

= $418000-409100= 8900 overapplied

Date	Accounts titles and explanation	Debit	Credit
1	Manufacturing overhead	$8900
	Cost of goods sold		$8900
	(To record overapplied overhead)

4-B)

Froya Fabrikker A/S
Schedule of Cost of Goods Sold
Beginning finished goods inventory	$75000
Add: Cost of goods manufactured	920000
Cost of goods available for sale	995000
Less: Ending finished goods inventory	(45000)
Unadjusted cost of goods sold	950000
Less: Overapplied overhead	(8900)
Adjusted cost of goods sold	$941100

5)

Froya Fabrikker A/S
Income Statement
Sales		$1950000
Less: Cost of goods sold		(950000)
Gross profit		1000000
Selling and administrative expenses:
Utilities expense	3700
Salaries expense	185000
Advertising expense	151000
Depreciation expense	17400
Rent expense	16800
Total selling and administrative expenses		(373900)
Net operating income		$626100