Question

Mr. Madden, a master cabinetmaker, owns and operates a custom-made cabinetry shop. He uses a normal costing system and applies overhead on the basis of direct labor cost. At the beginning of September, he had no outstanding debt and the following balances were in the general ledger:

            Cash                                        $ 16,000

            Raw Materials Inventory          $   2,200

            Plant Supplies Inventory          $   1,000           Stockholders’ Equity         

            Work in Process Inventory      $     ????               Common Stock                   ???

            Finished Goods Inventory       $          0              Retained Earnings          $1,500

The subsidiary ledgers for work in process are as follows:

            Job                   Materials          Labor               Overhead

            A-3                  $ 750               $1,100              $ 690

            A-4                  1,000                   650                 390

            A-5                    325                   800                 420

Other items of importance are:

1. Two additional jobs were started: A6, A7.
2. $2,775 of raw materials were purchased on account during the month
3. Raw materials used were; A-3 $280, A-4 $350. A-5 $520, A-6 $375, A-7 $300.
4. Plant supplies of $750 were purchased for cash, while $500 were used.
5. Direct labor incurred was A-3 $650, A-4 $1,400. A-5 $550, A-6 $490, A-7 $370 all to be paid in October.
6. Indirect labor incurred in September was $2,200 to be paid in October.
7. Overhead is applied to production; overhead is applied as 60% of direct labor cost.
8. General administrative expenses for the month, $3,325 were paid in cash.
9. Jobs A-3, A-5, and A-7 were finished.
10. A-3 was sold for $6,125 for cash and A-7 was sold for $1,750 on account.

REQUIRED:

1)

1. Prepare the balance sheet for August 31.
2. Prepare job cost sheets for all jobs A-3, A-4, A-5, A-6, A-7.
3. Prepare all of the journal entries and T-charts for September.
4. Prepare cost of goods manufactured statement for September.
5. Prepare the cost of goods sold statement for September.
6. Close the over-under applied overhead to the cost of goods sold for September.
7. Prepare the income statement for September.
8. Prepare a statement of retained earnings.
1. Prepare a balance sheet for September 30.
10. Without regard to the line 6 above, assume that the over or under applied overhead is MATERIAL. Prorate the balance to the appropriate accounts.

CONSIDER THE FOLLOWING SITUATION:

Mrs. Johnson had stopped by one day and asked for a price on some cabinets. Madden studied the plan and figured cost would be:

            Lumber                        $   600

            Finishing materials              75

            Labor                                640

            Overhead                          384

            Total                            $1,699

            With markup of 15%, the price would be $1,954.

Mrs. Johnson was incensed stating that a competitor down the street, Mr. James, quoted a price of $1,600. It is true that Madden does not want to lay off workers during slow times. What recommendation would you make? Why?

Answer 1

a.

Balance Sheet August 31
Assets		Stockholders Equity
Cash	$ 16,000	Common Stock	$ 23,825
Finished Goods Inventory	0	Retained Earnings	1,500
Work in Process Inventory	6,125
Raw Materials Inventory	2,200
Plant Supplies Inventory	1,000
Total Assets	$ 25,325	Total Liabilities and Stockholders Equity	$ 25,325

b.

Job Sheets For the month ending September 30
	A 3	A 4	A 5	A 6	A 7	Total
Work in Process, August 31	$ 2,540	$ 2,040	$ 1,545	-	-	$ 6,125
Costs added during September
Materials	280	350	520	375	300	1,825
Labor	650	1,400	550	490	370	3,460
Overhead	390	840	330	294	222	2,076
Total Manufacturing Costs	1,320	2,590	1,400	1,159	892	7,361
Total Cost or Work in Process	3,860	4,630	2,945	1,159	892	13,486
Less: Cost of Goods Manufactured	(3,860)	-	(2,945)	-	(892)	(7,697)
Work in Process, September 30	-	4,630	-	1,159	-	$ 5,789

c.

Transaction/ Event	General Journal	Debit	Credit
		$	$
1.	Raw Materials Inventory	2,775
	Accounts Payable		2,775
	To record purchase of raw materials on account
2.	Work in Process Inventory	1,825
	Raw Materials Inventory		1,825
	Direct materials used in production
3.a.	Plant Supplies Inventory	750
	Cash		750
	Purchase of plant supplies
3.b.	Manufacturing Overhead	500
	Plant Supplies Inventory		500
	Plant supplies consumed
4.	Work in Process Inventory	3,460
	Wages Payable		3,460
	Direct labor incurred
5.	Manufacturing Overhead	2,200
	Wages Payable		2,200
	Indirect labor incurred
6.	Work in Process Inventory	2,076
	Manufacturing Overhead		2,076
	To apply overhead to production
7.	General Administrative Expense	3,325
	Cash		3,325
	To record payment of general administrative expense incurred
8.	Finished Goods Inventory	7,697
	Work in Process Inventory		7,697
	To record cost of goods manufactured
9.	Cash	6,125
	Accounts Receivable	1,750
	Sales Revenue		7,875
	To record sales
10.	Cost of Goods Sold	4,752
	Finished Goods Inventory		4,752
	To record cost of goods sold

d.

Schedule of Cost of Goods Manufactured For the month ended September 30
Work in Process, August 31		$ 6,125
Add: Direct materials used
Raw materials inventory, August 31	$ 2,200
Raw materials purchased	2,775
Raw materials available for use	4,975
Less: Raw materials inventory, September 30	(3,150)	1,825
Direct labor		3,460
Overhead		2,076
Total manufacturing costs		7,361
Total cost of work in process		13,486
Less: Work in Process, September 30		(5,789)
Cost of Goods Manufactured		$ 7,697

e.

Schedule of Cost of Goods Manufactured For the month ended September 30
Finished Goods Inventory, August 31	$ 0
Add: Cost of Goods Manufactured	7,697
Cost of Goods Available for Sale	7,697
Less: Finished Goods Inventory, September 30	2,945
Cost of Goods Sold ( Unadjusted )	4,752
Add: Manufacturing Overhead Underapplied	624
Cost of Goods Sold ( Adjusted )	$ 5,376

f.

	Debit	Credit
Cost of Goods Sold	624
Manufacturing Overhead		624

g.

Income Statement For the month ending September 30
Sales Revenue	$ 7,875
Cost of Goods Sold	5,376
Gross Profit	2,499
General Administrative Expenses	3,325
Net income ( loss)	$ ( 826 )