Question

Star Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1 are given below.

 

Star Videos, Inc.
Balance Sheet
January 1
Assets
Cash				$	89,000
Accounts receivable					104,400
Inventories:
Raw materials (film, costumes)	$	20,200
Videos in process		59,000
Finished videos awaiting sale		82,400			161,600
Prepaid insurance					12,350
Studio and equipment (net)					618,000
Total assets				$	985,350
Liabilities and Stockholders’ Equity
Accounts payable				$	180,000
Retained earnings					805,350
Total liabilities and stockholders’ equity				$	985,350

 

Because the videos differ in length and in complexity of production, the company uses a job-order costing system to determine the cost of each video produced. Studio (manufacturing) overhead is charged to videos on the basis of camera-hours of activity. The company’s predetermined overhead rate for the year ($40 per camera-hour) is based on a cost formula that estimated $280,000 in manufacturing overhead for an estimated allocation base of 7,000 camera-hours. Any underapplied or overapplied overhead is closed to cost of goods sold. The following transactions were recorded for the year:

 

1. Film, costumes, and similar raw materials purchased on account, $194,500.

2. Film, costumes, and other raw materials issued to production, $210,000 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect).

3. Utility costs incurred (on account) in the production studio, $95,400.

4. Depreciation recorded on the studio, cameras, and other equipment, $88,400. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration.

5. Advertising expense incurred (on account), $139,500.

6. Salaries and wages paid in cash as follows:

 

Direct labor (actors and directors)	$	95,400
Indirect labor (carpenters to build sets, costume designers, and so forth)	$	82,000
Administrative salaries	$	97,400

 

1. Prepaid insurance expired during the year, $10,950 (70% related to production of videos, and 30% related to marketing and administrative activities).

2. Miscellaneous marketing and administrative expenses incurred (on account), $13,650.

3. Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year.

4. Videos that cost $504,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.

5. Sales for the year totaled $988,000 and were all on account. 

6. The total cost to produce the videos that were sold according to their job cost sheets was $544,730.

7. Collections from customers during the year totaled $938,000.

8. Payments to suppliers on account during the year, $528,000.

9. Underapplied or overapplied overhead $__?__.

 

Required:

1. Prepare a transaction analysis that records all of the above transactions.

2. Prepare a schedule of cost of goods manufactured for the year.

3. Prepare a schedule of cost of goods sold for the year.

4. Prepare an income statement for the year.

 

Answer 1

1.

	Star Videos, Inc.
	Transaction Analysis
	For the Year Ended December 31
		Cash	Accounts Receivable	Raw Materials	Videos in Process	Finished Videos	Manufacturing Overhead	Prepaid Insurance	Studio & Equipment (net)	=	Accounts Payable	Retained Earnings
	Beginning balance @ 1/1	89000	104400	20200	59000	82400	0	12350	618000	=	180000	805350
a)	Raw material purchases			194500						=	194500
b)	Raw materials used			-210000	178500		31500			=
c)	Utility costs						95400			=	95400
d)	Depreciation charges						66300		-88400	=		-22100
e)	Advertising									=	139500	-139500
f)	Salaries & wages	-274800			95400		82000			=		-97400
g)	Prepaid insurance						7665	-10950		=		-3285
h)	Miscellaneous marketing									=	13650	-13650
i)	Applied overhead				290000		-290000			=
j)	Transfer completed videos to finished goods				-504000	504000				=
k)	Sales		988000							=		988000
l)	Transfer finished goods to cost of goods sold					-544730				=		-544730
m)	Cash collections from customers	938000	-938000							=
n)	Payment to suppliers	-528000								=	-528000
o)	Overapplied overhead						7135			=		7135
	Ending balances @12/31	224200	154400	4700	118900	41670	0	1400	529600	=	95050	979820

2.

Star Videos, Inc.
Schedule of Cost of Goods Manufactured
For the Year Ended December 31
Beginning raw materials inventory $	20200
Add: Raw material purchases	194500
Raw materials available for use	214700
Less: Ending raw materials inventory	4700
Raw materials used	210000
Less: Indirect materials	31500	178500
Direct labor		95400
Manufacturing overhead		290000
Total manufacturing costs		563900
Add: Beginning videos in process inventory		59000
Total videos in process inventory		622900
Less: Ending videos in process inventory		118900
Cost of goods manufactured		504000

3.

Star Videos, Inc.
Schedule of Cost of Goods Sold
For the Year Ended December 31
Cost of goods manufactured	504000
Add: Beginning finished goods inventory	82400
Cost of goods available for sale	586400
Less: Ending finished goods inventory	41670
Cost of goods sold	544730
Less: Overapplied overhead	7135
Adjusted cost of goods sold $	537595

4.

Star Videos, Inc.
Income Statement
For the Year Ended December 31
Sales revenue	988000
Cost of goods sold	537595
Gross profit	450405
Operating expenses	275935
Net income $	174470