Star Videos, Inc., produces short musical videos for sale to retail outlets. The
ID: 2539141 • Letter: S
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.
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:
Film, costumes, and similar raw materials purchased on account, $216,500.
Film, costumes, and other raw materials issued to production, $225,500 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect).
Utility costs incurred (on account) in the production studio, $87,000.
Depreciation recorded on the studio, cameras, and other equipment, $109,200. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration.
Advertising expense incurred (on account), $135,000.
Salaries and wages paid in cash as follows:
Prepaid insurance expired during the year, $8,100 (70% related to production of videos, and 30% related to marketing and administrative activities).
Miscellaneous marketing and administrative expenses incurred (on account), $13,350.
Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year.
Videos that cost $586,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.
Sales for the year totaled $986,000 and were all on account.
The total cost to produce the videos that were sold according to their job cost sheets was $632,470.
Collections from customers during the year totaled $936,000.
Payments to suppliers on account during the year, $598,000.
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.
Star Videos, Inc. Balance Sheet January 1 Assets Cash $ 78,600 Accounts receivable 103,400 Inventories: Raw materials (film, costumes) $ 19,000 Videos in process 62,600 Finished videos awaiting sale 84,400 166,000 Prepaid insurance 9,250 Studio and equipment (net) 610,000 Total assets $ 967,250 Liabilities and Stockholders’ Equity Accounts payable $ 175,000 Retained earnings 792,250 Total liabilities and stockholders’ equity $ 967,250Explanation / Answer
Solution:
Part 1 --- Journal Entries
Film, costumes, and similar raw materials purchased on account, $216,500
General Journal
Debit
Credit
Raw materials
$216,500
Accounts Payable
$216,500
Film, costumes, and other raw materials issued to production, $225,500 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect).
General Journal
Debit
Credit
Work In Process (225,500*85%)
$191,675
Factory Overhead (225,500*15%)
$33,825
Accounts Payable
$225,500
Utility costs incurred (on account) in the production studio, $87,000.
General Journal
Debit
Credit
Factory Overhead
87,000
Accounts Payable
87,000
Depreciation recorded on the studio, cameras, and other equipment, $109,200. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration.
General Journal
Debit
Credit
Factory Overhead (109,200*3/4 Depreciation)
81,900
Selling and Administrative Expense (109200*1/4)
27,300
Accumulated Depreciation - Equipment
109,200
Advertising expense incurred (on account), $135,000
General Journal
Debit
Credit
Selling and Administrative Expense
135,000
Accounts Payable
135,000
Salaries and wages paid in cash
General Journal
Debit
Credit
Work In Process (Direct labor)
95,400
Factory Overhead (indirect labor)
70,000
Selling and Administrative Expense
97,200
Cash
262,600
Prepaid insurance expired during the year, $8,100 (70% related to production of videos, and 30% related to marketing and administrative activities).
General Journal
Debit
Credit
Factory Overhead (8100*70%)
5,670
Selling and Administrative Expense (8100*30%)
2,430
Prepaid Insurance
8,100
Miscellaneous marketing and administrative expenses incurred (on account), $13,350.
General Journal
Debit
Credit
Selling and Administrative Expense
13,350
Accounts Payable
13,350
Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year.
General Journal
Debit
Credit
Work In Process
(7,250 Camera Hours x Overhead Rate $40)
(Refer Note 1)
$290,000
Factory Overhead
$290,000
Note 1 --- Overhead Rate
Overhead Rate = Estimated Manufacturing Overhead $280,000 / Estimated Camera Hours 7,000
= $40 per camera hour
Applied Manufacturing Overhead = Actual Camera Hour 7,250 x Overhead Rate $40 = $290,000
Videos that cost $586,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.
General Journal
Debit
Credit
Finished Goods
586,000
Work In Process
586,000
Sales for the year totaled $986,000 and were all on account.
General Journal
Debit
Credit
Accounts Receivable
986,000
Sales Revenue
986,000
The total cost to produce the videos that were sold according to their job cost sheets was $632,470.
General Journal
Debit
Credit
Cost of Goods Sold
$632,470
Finished Goods
632,470
Collections from customers during the year totaled $936,000.
General Journal
Debit
Credit
Cash
$936,000
Accounts Receivable
$936,000
Payments to suppliers on account during the year, $598,000.
General Journal
Debit
Credit
Accounts Payable
$598,000
Cash
$598,000
Underapplied or overapplied overhead
Applied Manufacturing Overhead (as per note 1) = $290,000
Total Factory Overhead Incurred
$$
Indirect materials
$33,825
Utility Cost
$87,000
Depreciation
$81,900
Salaries and wages
$70,000
Insurance
$5,670
Actual Factory Overhead Incurred
$278,395
Applied Overheads are higher than actual incurred overhead, it means Overheads are OVERAPPLIED.
Over applied overhead = Applied Overhead $290,000 - $278,395 Actual Overhead Incurred
= $11,605
Over-Applied Overhead = $11,605
Part 2 --- schedule of cost of goods manufactured for the year.
Cost of Goods manufactured
$$
$$
Work in Process, Beginning (Video in process)
$62,600
Direct Materials used
$191,675
Direct Labor
$95,400
Manufacturing Overhead Applied (Refer Note 1)
$290,000
Total Manufacturing Cost
$577,075
Total cost of work in process
$639,675
Less: Work in Process, Ending (62,600 + 577,075 - Completed 586,000)
$53,675
Cost of Goods manufactured (given)
$586,000
Part 3 -- schedule of cost of goods sold for the year.
Schedule of Cost of Goods Sold
$$
Cost of Goods Manufactured (As per Part 2)
$586,000
Add: Beginning Finished Goods Inventory
$84,400
Cost of Goods Available for sale
$670,400
Less: Ending Finished Goods Inventory (Bal. fig)
$37,930
Unadjusted Cost of Goods Sold (before adjustment)
632,470
Less: Over-Applied Manufacturing Overhead
$11,605
Adjusted Cost of Goods Sold
$620,865
Part 4—Income Statement
Income Statement for the year
$$
Sales Revenue
$986,000
Less: Adjusted Cost of Goods Sold (As per Part 3)
$620,865
Gross Profit
$365,135
Selling and Administrative Expenses:
Depreciation
$27,300
Advertising Expense
$135,000
Salaries and Wages
$97,200
Insurance Expense
$2,430
Miscellaneous marketing and administrative expenses
$13,350
Total Selling and administrative Expenses
$275,280
Operating Profit
$89,855
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
General Journal
Debit
Credit
Raw materials
$216,500
Accounts Payable
$216,500
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