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Question:
The Smith Company uses a job-order cost system and applies to manufacture overhead cost
to jobs on the basis of direct labour cost. At the beginning of the most recent year, the following
estimates were made as a basis for computing the predetermined overhead rate for the year.
The following transactions took place during the year: (Note: all purchases and services were
acquired on account):
a.) Raw materials were purchased on account $150,000
b.) Raw materials requisitioned for use in production: Direct materials: $108,000 Indirect
materials: $32,000
c.) Advertising costs were incurred, $35,000
d.) Salaries and wages incurred as follows:
Direct labour
$150,000
Indirect labour
$90,000
Selling and administrative salaries
$125,000
e.) Maintenance costs incurred in the factory, $45,000
f.) Insurance expired during the year, $25,000 (60% relates to the factory, the remainder is on
selling and administrative items)
g.) Depreciation recorded for the year, $90,000 (70% relates to factory assets and the
remainder relates to selling and administrative assets)
h.) Rental cost incurred on buildings, $120,000, (80% of the space is occupied by the factory, the
remainder is occupied by offices)
i.) Manufacturing overhead cost was applied to jobs _____
j.) Goods costing $450,000 was completed and moved to the warehouse
k.) Sales for the year were $750,000. The total cost of the manufacturing these items was
$400,000
Required:
1.) Record journal entries for each of the items above.
2.) Is manufacturing overhead overapplied or underapplied? By how much?
3.) Record a journal entry to close manufacturing overhead to cost of goods sold.
4.) Prepare an income statement for the year.
Journal entry :
Journal entry involves the accounts, the debit and credit amount and a small narration of the
transaction. Journal entry is the first step of the accounting cycle. It serves as the basis of the
preparation of the financial statements.
Answer:
1)
Sr. No.
Description
Debit ($)
a)
Raw material
150,000
Accounts payable
b)
150,000
Work in process
108,000
Manufacturing overhead
32,000
Raw materials
c)
Advertising costs
140,000
35,000
Accounts payable
d)
35,000
Work in process
150,000
Manufacturing overhed
90,000
Selling and administrative salaries expenses
125,000
Salaries and wages payable
e)
Manufacturing overhead
365,000
45,000
Accounts payable
f)
45,000
Manufacturing overhead (WN 1)
15,000
Insurance expenses (WN 2)
10,000
Prepaid insurance
g)
Manufacturing overhead (WN 3)
Credit ($)
25,000
63,000
Depreciation expenses (WN 4)
27,000
Accumulated depreciation
h)
90,000
Manufacturing overhead (WN 5)
96,000
Office rent expenses (WN 6)
24,000
Rent payable
i)
Work in process
120,000
300,000
Manufacturing overhead (WN 7)
j)
Finished Goods
300,000
450,000
Work in process
k)
Accounts receivable
450,000
750,000
Sales
Cost of goods sold
750,000
400,000
Finished Goods
400,000
Working Notes:
1. Manufacturing overhead = 25,000 * 60% = $15,000
2. Insurance expenses = 25,000 * 40% = $10,000
3. Manufacturing overhead = 90,000 * 70% = $63,000
4. Depreciation expenses = 90,000 * 30% = $27,000
5. Manufacturing overhead = 120,000 * 80% = $96,000
6. Office rent expenses = 120,000 * 20% = $24,000
7. Manufacturing overhead = 150,000 * 2 = $300,000
2)
Actual manufacturing overhead can be calculated as follow:
Actual manufacturing overhead = Raw materials + Salaries and wages + Maintenance costs +
Insurance expenses + Depreciation expenses + Rent expenses
Actual manufacturing overhead = 32,000 + 90,000 + 45,000 + 15,000 + 63,000 + 96,000
Actual manufacturing overhead = $341,000
Under applied manufacturing overhead can be calculated as follow:
Under applied manufacturing overhead = Actual manufacturing overhead - Applied
manufacturing overhead
Under applied manufacturing overhead = 341,000 - 340,000
Under applied manufacturing overhead = $1,000
3)
Description
Debit ($)
Cost of goods sold
41,000
Manufacturing overhead (WN 8)
Credit ($)
41,000
Working Notes:
8. Manufacturing overhead = 341,000 - 300,000 = $41,000
4)
Net operating income can be calculated as follow:
Cost of goods sold = 400,000 + 41,000
Cost of goods sold = $441,000
Gross profit = Sales - Cost of goods sold
Gross profit = 750,000 - 441,000
Gross profit = $309,000
Net operating income = Gross profit - Advertising costs - Salaries and wages - Insurance
expenses - Depreciation expenses - Rent expenses
Net operating income = 309,000 - 35,000 - 125,000 - 10,000 - 27,000 - 24,000
Net operating income = $88,000