Question

Old 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 $330,000 of manufacturing overhead for an estimated activity level of $200,000 direct labor dollars. 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 on account, $275,000.
Raw materials used in production, $280,000 (materials costing $220,000 were charged directly to jobs; the remaining materials were indirect).
Costs for employee services were incurred as follows:



Direct labor $ 180,000
Indirect labor $ 72,000
Sales commissions $ 63,000
Administrative salaries $ 90,000


Rent for the year was $18,000 ($13,000 of this amount related to factory operations, and the remainder related to selling and administrative activities).
Utility costs incurred in the factory, $57,000.
Advertising costs incurred, $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 cost was applied to jobs, $ ? .
Goods that had cost $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:

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

Answer:

Req 1:

No Transaction General Journal Debit     Credit

1  a. Raw materials               275,000  

                   Accounts payable                     275,000

2 b. Work in process                220,000  

               Manufacturing overhead  60,000  

                   Raw materials                             280,000

3 c.  Work in process                 180,000  

            Manufacturing overhead         72,000  

         Sales commisions expense 63,000  

          Admin salaries expense         90,000  

                Salaries and wages payable    405,000

4 d. Manufacturing overhead 13,000  

               Rent expense                         5,000  

                     Accounts payable                      18,000

5 e. Manufacturing overhead 57,000  

                      Accounts payable                    57,000

6 f. Advertising expense    140,000  

                      Accounts payable                     140,000

7 g. Manufacturing overhead 88,000  

               Depreciation expense          12,000  

                       Accumulated depreciation      100,000

8 h. Work in process            297,000  

                       Manufacturing overhead      297,000

9 i. Finished goods             675,000  

                          Work in process                      675,000

10 j(1).   Cash                             1,250,000  

                      Sales                                      1,250,000

11 j(2). Cost of goods sold      700,000  

                      Finished goods                        700,000

Req 2: Screenshot Attached

Req 3A:

Manufacturing Overhead is Overapplied

Req 3B:

                 Manufacturing Overhead      7,000

                     Cost of Goods Sold                           7,000

Req 4: Screenshot Attached