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 $85,500 of manufacturing overhead for an estimated activity level of $45,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

Raw materials	$	10,900
Work in process	$	5,000
Finished goods	$	8,400

During the year, the following transactions were completed:

1. Raw materials purchased for cash, $ 164,000.
2. Raw materials used in production, $148,000 (materials costing $121,000 were charged directly to jobs; the remaining materials were indirect).
3. Cash paid to employees as follows:

Direct labor	$	170,000
Indirect labor	$	239,600
Sales commissions	$	28,000
Administrative salaries	$	41,000

4. 
   Cash paid for rent during the year was $18,900 ($13,500 of this amount related to factory operations, and the remainder related to selling and administrative activities).
5. Cash paid for utility costs in the factory, $12,000.
6. Cash paid for advertising, $14,000.
7. Depreciation recorded on equipment, $20,000. ($16,000 of this amount related to equipment used in factory operations; the remaining $4,000 related to equipment used in selling and administrative activities.)
8. Manufacturing overhead cost was applied to jobs, $ ? .
9. Goods that had cost $228,000 to manufacture according to their job cost sheets were completed.
10. Sales for the year (all paid in cash) totaled $502,000. The total cost to manufacture these goods according to their job cost sheets was $215,000.

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 overhead rate =			85500/45000
				1.9
No.	Accounting titles & Explanations					debit	Credit
a)	Raw materials inventory					164,000
	cash						164,000
b)	work in process inventory					121,000
	Factory overhead					27,000
	Raw materials inventory						148,000
c)	Work in process inventory					170,000
	Factory overhead					239,600
	Sales commission expense					28,000
	Salaries expense					41,000
	cash						478,600
d)	Factory overhead					13,500
	Rent expense					5,400
	cash						18,900
e)	Factory overhead					12,000
	cash						12,000
f)	Advertising expense					14,000
	cash						14,000
g)	Factory overhead					16,000
	Depreciation expense					4,000
	Accumulated depreciation						20,000
h)	work in process inventory					323000
	Factory overhead		(170000*190%)				323000
i)	finished goods inventory					228,000
	work in process inventory						228,000
j)	Cash					502,000
	Sales revenue						502,000
	cost of goods sold					215,000
	finished goods inventory						215,000
	T-Accounts
	Raw materials				Work in process
Bal	10,900				Bal	5,000
a)	164,000	148,000	b)		b)	121,000	228,000	i)
					c)	170,000
Bal	26,900				h)	323000
					Bal	391,000
					Manufacturing overhead
	Finished goods				beg.bal	0
Bal	8,400				b)	27,000	323000	h)
i)	228,000	215,000			c)	239,600
					d)	13,500
Bal	21,400				e)	12,000
					g)	16,000
							14,900	Bal
	cost of goods sold
Beg.bal	0
j)	215,000
3a)	Manufacturing overhead is over applied
3B)	Journal entry
	Account titles & Explanations					Debit	Credit
	Factory overhead					14,900
	Cost of goods sold						14,900
4)		Income Statement
	Sales						502,000
	less : cost of goods sold						200,100
	Gross margin						301,900
	less:Selling & administrative expense
	Sales comission					28,000
	Administrative salaries					41,000
	Rent exepense					5,400
	Advertising expense					14,000
	Depreciation expense					4,000	92,400
	Net operating income						209,500