Question

Gold Nest Company of Guandong, China, is a family-owned enterprise that makes birdcages for the South China market. The company sells its birdcages through an extensive network of street vendors who receive commissions on their sales. The company uses a job-order costing system in which overhead is applied to jobs on the basis of direct labor cost. Its predetermined overhead rate is based on a cost formula that estimated $103,500 of manufacturing overhead for an estimated activity level of $45,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows: Raw materials $ 10,600 Work in process $ 4,400 Finished goods $ 8,900 During the year, the following transactions were completed: Raw materials purchased for cash, $ 166,000. Raw materials used in production, $144,000 (materials costing $127,000 were charged directly to jobs; the remaining materials were indirect). Cash paid to employees as follows: Direct labor $ 151,000 Indirect labor $ 269,100 Sales commissions $ 21,000 Administrative salaries $ 42,000 Cash paid for rent during the year was $18,400 ($13,800 of this amount related to factory operations, and the remainder related to selling and administrative activities). Cash paid for utility costs in the factory, $15,000. Cash paid for advertising, $13,000. Depreciation recorded on equipment, $22,000. ($18,000 of this amount related to equipment used in factory operations; the remaining $4,000 related to equipment used in selling and administrative activities.) Manufacturing overhead cost was applied to jobs, $ ? . Goods that had cost $225,000 to manufacture according to their job cost sheets were completed. Sales for the year (all paid in cash) totaled $510,000. The total cost to manufacture these goods according to their job cost sheets was $219,000. Required: 1. Prepare journal entries to record the transactions for the year. 2. Prepare T-accounts for each inventory account, Manufacturing Overhead, and Cost of Goods Sold. Post relevant data from your journal entries to these T-accounts (don’t forget to enter the beginning balances in your inventory accounts). 3A. Is Manufacturing Overhead underapplied or overapplied for the year? 3B. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold. 4. Prepare an income statement for the year. All of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.

Answer 1

Manufacturing Overhead Depreciation expense 18,000 4,000 Accumulated depreciation 22.000 61 62 63 h 64 Work in Process Inventory 347.300 103500 Manufacturing Overhead applied 347.300 2.3 66 i Finished goods inventory 225,000 Work in Process Invento 225,000 Cash 510,000 69 70 71 72 73 74 75 76 Prepare t-accounts for inventories, Manufacturing Overhead, and Cost of Goods Sold Sales 510,000 Cost of goods sold 219,000 Finisned goods inventory 219,000 Raw material inventory A/C 144,000 78 79 80 81 10,600 166,000 32,600

Work In process inventory A/C 84 85 86 87 225,000 4,400 127,000 151,000 347,300 89 90 91 92 93 94 95 96 97 98 404,700 Manufacturing Overhead A/C 347,300 17,000 269,100 13,800 15,000 18,000 14,400 Overapplied 100 101 102 103 104 105 106 107 Finished goods Inventory A/C 8,900 225,000 219,000 14,900

Cost of goods sold A/C 110 14,400 219,000 204,600 112 113 114 115 116 Sales revenue A/C 510,000 510,000 118 119 120 Is Manufacturing Overhead underapplied or overapplied for the year? 121 122 123 124 125 126 127 Amount $ Particulars Actual overheads Applied Overheads Overapplied overheads 332,900 347,300 14,400 128 Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold 129 130 131 132 133 Debit Credit Account title & explanation 14,400 Manufacturing Overheads 14,400 Cost of goods Sold

135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 Prepare an Income Statement Income Statement Particulars Details $ Amount $ Sales less cost of Goods sold Gross Profit less selling & adminstrative Expenses Sales Commission Adminstrative salaries Rent Expense Advertising expense Depreciation expense Net Income 510,000 (204,600) 305,400 21,000 42,000 4,600 13,000 4,000 84,600 220,800