Question

Bunnell Corporation is a manufacturer that uses job-order costing. On January 1, the company’s inventory balances were as follows:

Raw materials	$	61,500
Work in process	$	32,400
Finished goods	$	42,900

The company applies overhead cost to jobs on the basis of direct labor-hours. For the current year, the company’s predetermined overhead rate of $13.75 per direct labor-hour was based on a cost formula that estimated $550,000 of total manufacturing overhead for an estimated activity level of 40,000 direct labor-hours. The following transactions were recorded for the year:

1. Raw materials were purchased on account, $514,000.
2. Raw materials use in production, $468,200. All of of the raw materials were used as direct materials.
3. The following costs were accrued for employee services: direct labor, $500,000; indirect labor, $150,000; selling and administrative salaries, $309,000.
4. Incurred various selling and administrative expenses (e.g., advertising, sales travel costs, and finished goods warehousing), $449,000.
5. Incurred various manufacturing overhead costs (e.g., depreciation, insurance, and utilities), $400,000.
6. Manufacturing overhead cost was applied to production. The company actually worked 41,000 direct labor-hours on all jobs during the year.
7. Jobs costing $1,459,350 to manufacture according to their job cost sheets were completed during the year.
8. Jobs were sold on account to customers during the year for a total of $2,985,000. The jobs cost $1,469,350 to manufacture according to their job cost sheets.

Questions:

1-1. Is manufacturing overhead underapplied or overapplied for the year? By how much?

1-2. What is the cost of goods available for sale during the year?

1-3. What is the journal entry to record the cost of goods sold referred to in item h above?

2-1. What is the ending balance in Finished Goods?

2-2. Assuming that the company closes its underapplied or overapplied overhead to Cost of Goods Sold, what is the adjusted cost of goods sold for the year?

3. What is the gross margin for the year?

4. What is the net operating income for the year?

Answer 1

1-1.

Under/over manufacturing overhead applied = Applied overhead - Actual overhead

Applied overhead = 41,000*$13.75 = $563,750

Actual overhead = $400,000+150,000 (indirect labor) = $550,000

Under/over manufacturing overhead applied = $563,750 - 550,000 = $13,750

Manufacturing overhead is over applied by $13,750.

1-2.

Cost of goods available for sale = Beginning finished goods inventory + Cost of goods completed

Cost of goods available for sale = $42,900+1,459,350 = $1,502,250

1-3.

General Journal	Debit	Credit
Cost of goods sold	$1,469,350
Finished goods inventory		$1,469,350

2-1.

Ending finished goods inventory = Beginning finished goods inventory + Cost of goods completed - cost of goods sold

Ending finished goods inventory = $42,900+1,459,350-1,469,350 = $32,900

2-2.

Adjusted cost of goods sold = Unadjusted cost of goods sold - overapplied overhead

Adjusted cost of goods sold = $1,469,350 - 13,750 = $1,455,600

3.

Gross margin = Sales - Adjusted cost of goods sold

Gross margin = $2,985,000 - 1,455,600 = $1,529,400

4.

Net operating income = Gross margin - Selling and administrative (salaries+expenses)

Net operating income = $1,529,400 - 758,000 ($309,000+449,000)

Net operating income = $771,400