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 $68,000 of manufacturing overhead for an estimated activity level of $40,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,500
Work in process	$	4,000
Finished goods	$	8,200

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 168,000.
2. Raw materials used in production, $147,000 (materials costing $123,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	172,000
Indirect labor	$	202,400
Sales commissions	$	23,000
Administrative salaries	$	42,000

4. Rent for the year was $18,500 ($13,800 of this amount related to factory operations, and the remainder related to selling and administrative activities).
5. Utility costs incurred in the factory, $20,000.
6. Advertising costs incurred, $12,000.
7. 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.)
8. Record the manufacturing overhead cost applied to jobs.
9. Goods that had cost $229,000 to manufacture according to their job cost sheets were completed.
10. Sales for the year (all paid in cash) totaled $504,000. 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

Q1

Transaction	General Journal	Debit	Credit
a.	Raw Materials	$        168,000
	Accounts payable		$        168,000
b.	Work In process	$        123,000
	Manufacturing Overhead	$          24,000
	Raw Materials		$        147,000
c.	Work In process	$        172,000
	Manufacturing Overhead	$        202,400
	Sales Commission Expense	$          23,000
	Salaries Expense	$          42,000
	Cash		$        439,400
d.	Manufacturing Overhead	$          13,800
	Rent Expense	$            4,700
	Cash		$          18,500
e.	Manufacturing Overhead	$          20,000
	Cash		$          20,000
f.	Advertising Expense	$          12,000
	Cash		$          12,000
g.	Maufacturing Overhead	$          18,000
	Depriciation Expense	$            4,000
	Accumulated Depriciaition		$          22,000
h.	Work In process	$        292,400
	Manufacturing Overhead		$        292,400
i.	Finished Goods	$        229,000
	Work In process		$        229,000
j(1)	Cash	$        504,000
	Sales		$        504,000
j(2)	Cost Of goods Sold	$        219,000
	Finished Goods		$        219,000

Q2

T-ACCOUNTS

Raw Materials
Beg. Bal.	10500	b.	147000
a.	168000
Ending Bal.	31500
Finished Goods
Beg Bal.	8200	j.	219000
i.	229000
Ending Bal.	18200
Cost Of goods sold
j.	219000
Ending Bal.	219000

Work In process
Beg. Bal.	4000	i.	229000
b.	123000
c.	172000
h.	292400
Ending Bal.	362400
Manufacturing Overhead
b.	24000	h.	292400
c.	202400
d.	13800
e.	20000
g.	18000
		Ending Bal.	14200

Ques 3

3-a	Manufacturing overhead overapplied
3-b	Manufacturing overhead	$          14,200
	Cost of goods sold		$          14,200

Q4

Income Statement
Sales		$      504,000
Less
Cost of goods Sold	$     219,000
	$     (14,200)	$      204,800
Gross Margin		$      299,200
Selling and admn. Expenses
Sales Commission Expense	$        23,000
Salaries Expense	$        42,000
Rent expense	$          4,700
Advertising expense	$        12,000
depriciation expense	$          4,000	$         85,700
Net operating income		$      213,500

WORKING

Predetrmined overhead rate=Estimated total manufacturing overhead case/estimated total amount of allocation base
						($95,000/$50,000)		170%	of direct labor cost
						Actual Labor cost=$172,000
Overheads=$172,000 * 170%			292400