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 $399,000 of manufacturing overhead for an estimated allocation base of 1,050 direct labor-hours. The following transactions took place during the year:

1. Raw materials purchased on account, $280,000.
2. Raw materials used in production (all direct materials), $265,000.
3. Utility bills incurred on account, $75,000 (80% related to factory operations, and the remainder related to selling and administrative activities).
4. Accrued salary and wage costs:

Direct labor (1,100 hours)	$	310,000
Indirect labor	$	106,000
Selling and administrative salaries	$	190,000

5. Maintenance costs incurred on account in the factory, $70,000
6. Advertising costs incurred on account, $152,000.
7. Depreciation was recorded for the year, $88,000 (85% related to factory equipment, and the remainder related to selling and administrative equipment).
8. Rental cost incurred on account, $113,000 (90% related to factory facilities, and the remainder related to selling and administrative facilities).
1. Manufacturing overhead cost was applied to jobs, $ ? .
10. Cost of goods manufactured for the year, $930,000.
11. Sales for the year (all on account) totaled $2,000,000. These goods cost $960,000 according to their job cost sheets.

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

Raw Materials	$	46,000
Work in Process	$	37,000
Finished Goods	$	76,000

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.

Transaction / Event	Account Titles	Debit	Credit
		$	$
a.	Raw Materials Inventory	280,000
	Accounts Payable		280,000
b.	Work in Process Inventory	265,000
	Raw Materials Inventory		265,000
c.	Manufacturing Overhead	60,000
	Utilities Expense	15,000
	Utilities Payable		75,000
d.	Work in Process Inventory	310,000
	Manufacturing Overhead	106,000
	Selling and Administrative Salaries	190,000
	Salaries and Wages Payable		606,000
e.	Manufacturing Overhead	70,000
	Accounts Payable		70,000
f.	Advertising Expense	152,000
	Accounts Payable		152,000
g.	Manufacturing Overhead	74,800
	Depreciation Expense	13,200
	Accumulated Depreciation		88,000
h.	Manufacturing Overhead	101,700
	Rent Expense	11,300
	Rent Payable		113,000
i.	Work in Process Inventory	418,000
	Manufacturing Overhead ( 399,000 / 1,050) * 1,100		418,000
j.	Finished Goods Inventory	930,000
	Work in Process Inventory		930,000
k.1.	Accounts Receivable	2,000,000
	Sales Revenue		2,000,000
k.2	Cost of Goods Sold	960,000
	Finished Goods Inventory		960,000

2.

Raw Materials Inventory
Beginning balance	46,000	b.	265,000
a.	280,000
Ending balance	61,000
Work in Process Inventory
Beginning balance	37,000	j.	930,000
b.	265,000
d.	310,000
i.	418,000
Ending balance	100,000
Finished Goods Inventory
Beginning balance	76,000	k.	960,000
j.	930,000
Ending balance	46,000
Manufacturing Overhead
c.	60,000	i.	418,000
d.	106,000
e.	70,000
g.	74,800
h.	101,700
		Balance ( Overapplied )	5,500
Cost of Goods Sold
k.	960,000

3.

Schedule of Cost of Goods Manufactured
Direct materials used	$ 265,000
Direct labor	310,000
Manufacturing overhead	418,000
Total Manufacturing Costs	993,000
Add: Beginning work in process	37,000
Total cost of work in process	1,030,000
Less: Ending Work in Process	100,000
Cost of Goods Manufactured	930,000

4. A.

	Debit	Credit
Manufacturing Overhead	5,500
Cost of Goods Sold		5,500

4. B.

Schedule of Cost of Goods Sold
Beginning finished goods inventory	$ 76,000
Add: Cost of goods manufactured	930,000
Cost of goods available for sale	1,006,000
Less: Ending finished goods inventory	46,000
Unadjusted Cost of goods sold	960,000
Less: Manufacturing overhead overapplied	5,500
Adjusted Cost of Goods Sold	$ 954,500

5.

Income Statement For the year ended.....
Sales Revenue	$ 2000,000
Less: Cost of Goods Sold	954,500
Gross Profit	1,045,500
Selling and Administrative Expenses
Advertising Expense	152,000
Salaries and Wages Expense	190,000
Rent Expense	11,300
Utilities Expense	15,000
Depreciation Expense	13,200
Net Operating Income	$ 664,000