Question

Star Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1 are given below.

Star Videos, Inc.
Balance Sheet
January 1
Assets
Cash				$	88,800
Accounts receivable					114,400
Inventories:
Raw materials (film, costumes)	$	26,800
Videos in process		64,000
Finished videos awaiting sale		80,400			171,200
Prepaid insurance					11,450
Studio and equipment (net)					598,000
Total assets				$	983,850
Liabilities and Stockholders’ Equity
Accounts payable				$	188,000
Retained earnings					795,850
Total liabilities and stockholders’ equity				$	983,850

Because the videos differ in length and in complexity of production, the company uses a job-order costing system to determine the cost of each video produced. Studio (manufacturing) overhead is charged to videos on the basis of camera-hours of activity. The company’s predetermined overhead rate for the year ($40 per camera-hour) is based on a cost formula that estimated $280,000 in manufacturing overhead for an estimated allocation base of 7,000 camera-hours. Any underapplied or overapplied overhead is closed to cost of goods sold. The following transactions were recorded for the year:

1. Film, costumes, and similar raw materials purchased on account, $219,000.
2. Film, costumes, and other raw materials issued to production, $231,000 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect).
3. Utility costs incurred (on account) in the production studio, $81,600.
4. Depreciation recorded on the studio, cameras, and other equipment, $94,800. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration.
5. Advertising expense incurred (on account), $144,000.
6. Salaries and wages paid in cash as follows:

Direct labor (actors and directors)	$	89,400
Indirect labor (carpenters to build sets, costume designers, and so forth)	$	92,000
Administrative salaries	$	111,600

1. Prepaid insurance expired during the year, $10,950 (70% related to production of videos, and 30% related to marketing and administrative activities).
2. Miscellaneous marketing and administrative expenses incurred (on account), $13,850.
3. Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year.
4. Videos that cost $562,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.
5. Sales for the year totaled $1,126,000 and were all on account.
6. The total cost to produce the videos that were sold according to their job cost sheets was $606,790.
7. Collections from customers during the year totaled $1,076,000.
8. Payments to suppliers on account during the year, $522,000.
9. Underapplied or overapplied overhead $__?__.

Required:

1. Prepare a transaction analysis that records all of the above transactions.

2. Prepare a schedule of cost of goods manufactured for the year.

3. Prepare a schedule of cost of goods sold for the year.

4. Prepare an income statement for the year.

Answer 1

1.

_______________________________________________

Compute manufacturing overhead:

Indirect Material	$34,650
Indirect labor	$92,000
Utility cost	$81,600
Depreciation [$94800 * 3/4]	$71,100
Prepaid insurance [$10950 * 70%]	$7,665
Total manufacturing overhead	$287,015
Less: Overhead applied [7250 hours * $40]	($290,000)
Under/(over) applied overhead	($2,985)

________________________________________________________

_______________________________________________

3.

Schedule of Cost of goods sold:

Schedule of Cost of goods Sold
For the year ended december 31
Beg. Finished goods inventory		$80,400
Add: Cost of goods manufactured		$562,000
Cost of goods available for sale		$642,400
Less: Ending Finished goods inventory		($35,610)
Unadjusted cost of goods sold		$606,790
Less: Overapplied overhead		($2,985)
Adjusted cost of goods sold		$603,805

_______________________________________________________

4.

Income Statement
Sales	$1,126,000
Less: COGS	$603,805
Gross margin	$522,195
Less: Selling & Admin expense	($296,435)
Net operating income	$225,760

W.N:

Depreciation expense [$94800 * 1/4]	$23,700
Advertising expense	$144,000
Admin. Salaries	$111,600
Insurance expense [$10950 * 30%]	$3,285
Miscellaneous marketing	$13,850
Total Selling & Admin. Expenses	$296,435