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 $360,000 of manufacturing overhead for an estimated allocation base of 900 direct labor-hours. The following transactions took place during the year:

1. Raw materials purchased on account, $200,000.
2. Raw materials used in production (all direct materials), $185,000.
3. Utility bills incurred on account, $70,000 (90% related to factory operations, and the remainder related to selling and administrative activities).
4. Accrued salary and wage costs:

Direct labor (975 hours)	$	230,000
Indirect labor	$	90,000
Selling and administrative salaries	$	110,000

1. Maintenance costs incurred on account in the factory, $54,000.
2. Advertising costs incurred on account, $136,000.
3. Depreciation was recorded for the year, $95,000 (80% related to factory equipment, and the remainder related to selling and administrative equipment).
4. Rental cost incurred on account, $120,000 (85% related to factory facilities, and the remainder related to selling and administrative facilities).
5. Manufacturing overhead cost was applied to jobs, $ ? .
6. Cost of goods manufactured for the year, $770,000.
7. Sales for the year (all on account) totaled $1,200,000. These goods cost $800,000 according to their job cost sheets.

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

Raw Materials	$	30,000
Work in Process	$	21,000
Finished Goods	$	60,000

Required:

5. Prepare an income statement for the year.

Prepare an income statement for the year.

Froya Fabrikker A/S
Income Statement
For the Year Ended
Selling and administrative expenses:

Answer 1

Froya Fabrikker A/S
Income Statement
For the Year Ended
Sales		1200000
Cost of goods sold		795000	=800000-5000
Gross margin		405000
Selling and administrative expenses:
Utilities expense	7000		=70000*10%
Advertising expense	136000
Salaries expense	110000
Depreciation expense	19000		=95000*20%
Rent expense	18000		=120000*15%
		290000
Net operating income		115000
Workings:
Predetermined overhead rate	400		=360000/900
Manufacturing overhead:
Utilities	63000		=70000*90%
Indirect labor	90000
Maintenance costs	54000
Depreciation	76000		=95000*80%
Rental cost	102000		=120000*85%
Actual Manufacturing overhead	385000
Manufacturing overhead applied	390000		=975*400