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 $373,700 of manufacturing overhead for an estimated allocation base of 1,010 direct labor-hours. The following transactions took place during the year:

1. Raw materials purchased on account, $255,000.
2. Raw materials used in production (all direct materials), $240,000.
3. Utility bills incurred on account, $70,000 (95% related to factory operations, and the remainder related to selling and administrative activities).
4. Accrued salary and wage costs:

Direct labor (1,085 hours)	$	285,000
Indirect labor	$	101,000
Selling and administrative salaries	$	165,000

5. Maintenance costs incurred on account in the factory, $65,000
6. Advertising costs incurred on account, $147,000.
7. Depreciation was recorded for the year, $83,000 (80% related to factory equipment, and the remainder related to selling and administrative equipment).
8. Rental cost incurred on account, $108,000 (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, $880,000.
11. Sales for the year (all on account) totaled $1,750,000. These goods cost $910,000 according to their job cost sheets.

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

Raw Materials	$	41,000
Work in Process	$	32,000
Finished Goods	$	71,000

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

journal entries

S.no	particular	debit ($)	credit ($)
1	Raw material inventory	255000
	Accounts payable		255000
2	work in process	240000
	Raw material inventory		240000
3	Manufacturing OVERHEAD(70000×95%)	66500
	Utility expenses	3500
	Utility payable		70000
4	work in process	285000
	Manufacturing OVERHEAD	101000
	Selling and administrative salaries	165000
	Wages payable		551000
5	Manufacturing OVERHEAD	65000
	Accounts payable		65000
6	advertising expenses	147000
	Accounts payable		147000
7	Manufacturing OVERHEAD(83000×80%)	66400
	Depreciation	16600
	Accumulated depreciation		83000
8	Manufacturing OVERHEAD(108000×85)	91800
	Rental expenses	16200
	Rental payable		108000
9	work in process(note below)	401450
	Manufacturing OVERHEAD		401450
10	finished goods	880000
	Work in process		880000
11	accounts receivable	1750000
	Sales		1750000
12	cost of goods sold	910000
	Finished goods		910000

Note:

PRE DETERMINED OVERHEAD rate=$373700/1010=370 per direct labour hour

Appiled overhead=1085hrs×$370=$401450

T accounts

   RAW MATERIAL inventory

Beginning balance	41000	work in process	240000
Accounts payable	255000	balance	56000

   Work in process

Beginning balance	32000	finished goods	880000
RAW MATERIAL inventory	240000
Wages payable	285000
Manufacturing OVERHEAD	401450	balance	78450

finished goods

Beginning balance	71000	cost of goods sold	910000
Work in process	880000	balance	41000

Manufacturing OVERHEAD

Utilities payable	66500	work in process	401450
Wages payable	101000
Accounts payable	65000
Accumulated depreciation	66400
Rental payable	91800
Balance (overapplied)	10750

3) prepare a schedule of cost of goods manufactured

Particular	amount ($)
Direct material	240000
Direct labour	285000
Manufacturing OVERHEAD	401450
Total Manufacturing cost	926450
+Beginning work in process	32000
(-) ending work in process	(78450)
cost of goods manufactured	880000

4a)

Manufacturing OVERHEAD(overapplied)	10750
Cost of goods sold		10750

4b) prepare a schedule of cost of goods sold

Particular	amount ($)
Beginning finished goods	71000
Cost of goods manufactured	880000
Cost of goods available for sale	951000
(-) ending finished goods	(41000)
Unadjusted cost of goods	910000
(-) overapplied Manufacturing OVERHEAD	(10750)
cost of goods sold	899250

5) income statement

Particular	amount ($)
Revenue	1750000
(-) cost of goods sold	(899250)
Gross margin	850750
(-) expenses
Utilities expenses	(3500)
Selling and administrative salaries	(165000)
Advertising expenses	(147000)
Depreciation	(16600)
Rental expenses	(16200)
operating income	502450

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