Question

Gold Nest Company, 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 hours worked. Its predetermined overhead rate is based on a cost formula that estimated $330,000 of manufacturing overhead for an estimated activity level of 1,500 direct labor hours, or $220 per direct labor hour. At the beginning of the year, the inventory balances were as follows: Raw Materials $ 25,000 Work in Process $ 10,000 Finished Goods $ 40,000 During the year, the following transactions were completed: Raw Materials purchased for cash, $275,000. Raw Materials used in production, $280,000 (materials costing $220,000 were charged directly to jobs, the remaining were indirect). Raw Materials ending inventory balance, $20,000. Cash paid to employees as follows: Direct Labor (1,350 hours) $180,000 Indirect Labor $72,000 Sales Commissions $63,000 Administrative salaries $90,000 Cash paid for rent during the year was $18,000 ($13,000 of this amount related to factory operations, and $5,000 related to selling and administrative activities). Cash paid for utility costs in the factory, $57,000. Cash paid for advertising, $140,000. Depreciation recorded on equipment, $100,000 ($88,000 of this amount related to equipment used in factory operations; the remaining $12,000 related to equipment used in selling and administrative activities). Manufacturing overhead costs was applied to jobs, $ _________. Goods that had costs $675,000 to manufacture according to their job cost sheets were completed. Sales for the year (all paid in cash) totaled $1,250,000. The total cost to manufacture these goods according to their job cost sheets was $700,000. Required: USING THE SPREADSHEET BELOW Prepare T-accounts for each inventory account and Manufacturing Overhead. Using the transactions above complete these T-accounts (reminder: enter the beginning balances in the inventory accounts). Compute an ending balance in each account. Is Manufacturing Overhead under applied or over applied for the year? Close any balance in the Manufacturing Overhead account to Cost of Goods Sold. Prepare a schedule of cost of goods manufactured. Prepare a schedule of cost of goods sold. Prepare an income statement for the year.

Answer 1

1. T - Accounts

Raw material inventory
$25,000	$280,000
$275,000
$20,000
WIP inventory
$10,000	$675,000
$220,000
$180,000
$297,000
$32,000
Manufacturing OH
$60,000	$297,000
$72,000
$13,000
$57,000
$88,000
	$7,000
Finished goods
$40,000	$700,000
$675,000
$15,000
Cost of goods sold
$700,000	$7,000
$693,000
Sales revenue
	$1,250,000
	$1,250,000

2. Manufacturing Overhead under applied or over applied

Actual overheads	$290,000
Applied overheads	$297,000
Overapplied overheads	$7,000

3. Closing entry

Account	Debit	Credit
Manufacturing overheads	$7,000
Cost of goods sold		$7,000

4. Income Statement

Particulars	Amount	Amount
Sales		$1,250,000
Less: Cost of goods sold		$693,000
Gross Profit		$557,000
Less: Selling and administrative expenses
Sales commission	$63,000
Administrative salaries	$90,000
Rent expense	$5,000
Advertising expense	$140,000
Depreciation expense	$12,000	$310,000
Net Income		$247,000