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 $349,800 of manufacturing overhead for an estimated allocation base of 1,060 direct labor-hours. The following transactions took place during the year:

1. Raw materials purchased on account, $230,000.
2. Raw materials used in production (all direct materials), $215,000.
3. Utility bills incurred on account, $65,000 (85% related to factory operations, and the remainder related to selling and administrative activities).
4. Accrued salary and wage costs:

Direct labor (1,135 hours)	$	260,000
Indirect labor	$	96,000
Selling and administrative salaries	$	140,000

5. Maintenance costs incurred on account in the factory, $60,000
6. Advertising costs incurred on account, $142,000.
7. Depreciation was recorded for the year, $90,000 (75% related to factory equipment, and the remainder related to selling and administrative equipment).
8. Rental cost incurred on account, $115,000 (80% 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, $830,000.
11. Sales for the year (all on account) totaled $1,500,000. These goods cost $860,000 according to their job cost sheets.

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

Raw Materials	$	36,000
Work in Process	$	27,000
Finished Goods	$	66,000

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.

Accounts Receivable Sales Beo Bal Beg Bal End. Bal End. Bal. Raw Materials Cost of Goods Sold Beg Bal End. Bal Work in Process Manufacturing Overhead Beg Bal End Bal Finished Goods Advertising Expense End. Bal. Accumulated Depreciation Utilities Expense Bea Bal Beg Bal End Bal. Accounts Payable Salaries Expense Beg Bali Beg. Bal. End. Bal. Depreciation Expense Salaries & Wages Payable Beg Bal Beg Bal End Bal. End Bal Rent Expense Beg Bal End Sal

Answer 1

Predetermined overhead rate = $349800/1060 = $330 per direct labor hour

1.

Transaction	General Journal	Debit	Credit
a.	Raw materials	230000
	Accounts payable		230000
	(To record raw materials purchased on account)
b.	Work in process	215000
	Raw Materials		215000
	(To record direct materials used in production)
c.	Manufacturing overhead ($65000 x 85%)	55250
	Utilities expense ($65000 x 15%)	9750
	Accounts Payable		65000
	(To record utility bills incurred on account)
d.	Work in process	260000
	Manufacturing overhead	96000
	Salaries expense	140000
	Salaries and wages payable		496000
	(To record salary and wage costs incurred)
e.	Manufacturing overhead	60000
	Accounts payable		60000
	(To record maintenance costs incurred on account in factory)
f.	Advertising expense	142000
	Accounts payable		142000
	(To record advertising costs incurred on account)
g.	Manufacturing overhead ($90000 x 75%)	67500
	Depreciation expense ($90000 x 25%)	22500
	Accumulated depreciation		90000
	(To record depreciation for the year)
h.	Manufacturing overhead ($115000 x 80%)	92000
	Rent expense ($115000 x 20%)	23000
	Accounts Payable		115000
	(To record rental cost incurred on account)
i.	Work in process (1135 x $330)	374550
	Manufacturing overhead		374550
	(To record manufacturing overhead applied)
j.	Finished goods	830000
	Work in process		830000
	(To record goods completed and transferred to finished goods)
k(1)	Accounts receivable	1500000
	Sales		1500000
	(To record sales on account)
k(2)	Cost of goods sold	860000
	Finished goods		860000
	(To record cost of sales)

2.

Sales Accounts Receivable Beg. Bal. 1500000 Beg. Bal. k(1) 1500000 k(1) End. Bal. 1500000 End. Bal. 1500000 Cost of Goods Sold Beg. Bal. Raw Materials 36000 230000 215000 b. Beg. Bal. k(2) 860000 End. Bal. 860000 End. Bal. 51000 Beg. Bal. Work in Process 27000 215000 830000 j. 260000 374550 غ مه ته هن ق Manufacturing Overhead Beg. Bal. 55250 374550 i. 96000 60000 67500 92000 End. Bal. 46550 End. Bal. 3800

Finished Goods					Advertising Expense
Beg. Bal.	66000				Beg. Bal.	0
j.	830000	860000	k(2)		f.	142000
					End. Bal.	142000
End. Bal.	36000
Accumulated Depreciation					Utilities Expense
Beg. Bal.		0			Beg. Bal.	0
		90000	g.		c.	9750
End. Bal.		90000			End. Bal.	9750
Accounts Payable					Salaries Expense
Beg. Bal.		0			Beg. Bal.	0
		230000	a.		d.	140000
		65000	c.
		60000	e.		End. Bal.	140000
		142000	f.
		115000	h.
End. Bal.		612000
Depreciation Expense					Salaries and Wages Payable
Beg. Bal.	0				Beg. Bal.		0
g.	22500						496000	d.
End. Bal.	22500				End. Bal.		496000
Rent Expense
Beg. Bal.	0
h.	23000
End. Bal.	23000

4A Transaction General Journal Debit Credit Manufacturing overhead 3800 Cost of goods sold 3800 (To close overapplied overheads to cost of goods sold) Froya Fabrikker A/S Schedule of Cost of Goods Manufactured Direct materials: Beginning raw materials inventory 36000 Add: Purchases of raw materials 230000 Total raw materials available 266000 Less: Ending raw materials inventory 51000 Materials used in production Direct labor Manufacturing overheads Total manufacturing costs incurred Add: Beginning work in process inventory Total manufacturing costs Less: Ending work in process inventory Cost of goods manufactured $ 215000 260000 374550 849550 27000 876550 46550 830000

Froya Fabrikker A/S Schedule of Cost of Goods Sold Cost of goods manufactured Add: Beginning finished goods inventory Cost of goods available for sale Less: Ending finished goods inventory Cost of goods sold $ Less: Manufacturing overheads overapplied Adjusted cost of goods sold $ 830000 66000 896000 36000 860000 3800 856200 1500000 856200 643800 Froya Fabrikker A/S Income Statement For the Year Ended Sales revenue Cost of goods sold Gross profit Selling and administrative expenses: Utilities expense Salaries expense Advertising expense Depreciation expense Rent expense Net operating income $ 9750 140000 142000 22500 23000 337250 306550