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 $95,000 of manufacturing overhead for an estimated activity level of $50,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,700
Work in process	$	4,100
Finished goods	$	8,800

During the year, the following transactions were completed:

1. Raw materials purchased on account, $162,000.
2. Raw materials used in production, $146,000 (materials costing $126,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

Direct labor	$	160,000
Indirect labor	$	230,000
Sales commissions	$	22,000
Administrative salaries	$	49,000

1. Rent for the year was $18,500 ($13,500 of this amount related to factory operations, and the remainder related to selling and administrative activities).
2. Utility costs incurred in the factory, $11,000.
3. Advertising costs incurred, $14,000.
4. Depreciation recorded on equipment, $21,000. ($16,000 of this amount related to equipment used in factory operations; the remaining $5,000 related to equipment used in selling and administrative activities.)
5. Manufacturing overhead cost was applied to jobs, $ ? .
6. Goods that had cost $229,000 to manufacture according to their job cost sheets were completed.
7. Sales for the year (all paid in cash) totaled $509,000. 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

Predetermined manufacturing overhead rate = Total estimated manufacturing overhead/Total estimated direct labor cost = $95000/$50000 = 190% of direct labor cost

1.

Transaction	General Journal	Debit	Credit
a.	Raw Materials	162000
	Cash		162000
	(To record materials purchased for cash)
b.	Work in process	126000
	Manufacturing overheads	20000
	Raw Materials		146000
	(To record raw materials requisitioned)
c.	Work in process	160000
	Manufacturing overheads	230000
	Sales commission expense	22000
	Administrative salaries expense	49000
	Cash		461000
	(To record cost of employee services incurred)
d.	Manufacturing overheads	13500
	Rent expense	5000
	Cash		18500
	(To record rent incurred)
e.	Manufacturing overheads	11000
	Cash		11000
	(To record utilities costs incurred)
f.	Advertising expense	14000
	Cash		14000
	(To record advertising costs incurred)
g.	Manufacturing overheads	16000
	Depreciation expense	5000
	Accumulated depreciation-equipment		21000
	(To record depreciation on equipment)
h.	Work in process	304000
	Manufacturing overheads (190% x $160000)		304000
	(To record manufacturing overhead applied to jobs)
i.	Finished goods	229000
	Work in process		229000
	(To record cost of jobs completed and transferred)
j(1)	Cash	509000
	Sales Revenue		509000
	(To record cash sales)
j(2)	Cost of goods sold	219000
	Finished goods		219000
	(To record cost of goods sold)

2.

Raw Materials					Work in Process
Beg. Bal.	10700	146000	b.		Beg. Bal.	4100	229000	i.
a.	162000				b.	126000
					c.	160000
					h.	304000
End. Bal.	26700
					End. Bal.	365100
Finished Goods					Manufacturing Overhead
Beg. Bal.	8800	219000	j(2)		Beg. Bal.
i.	229000				b.	20000	304000	h.
					c.	230000
					d.	13500
End. Bal.	18800				e.	11000
					g.	16000
Cost of Goods Sold					End. Bal.		13500
Beg. Bal.
j(2)	219000
End. Bal.	219000

3A. Overapplied

Manufacturing overhead incurred $290500 - Manufacturing overhead applied $304000 = Overheads overapplied $13500

3B.

General Journal	Debit	Credit
Manufacturing overhead	13500
Cost of goods sold		13500
(To close manufacturing overheads to cost of goods sold)

4.

Gold Nest Company
Income Statement
For the Year Ended
Sales		509000
Cost of goods sold ($219000 - $13500)		205500
Gross profit		303500
Selling and administrative expenses:
Sales commission expense	22000
Advertising expense	14000
Administrative salaries expense	49000
Rent expense	5000
Depreciation expense	5000
		95000
Net income		208500