PROBLEM TWO Mr. Radiance, a master cabinetmaker, owns and operates a custom-made

Question

PROBLEM TWO

Mr. Radiance, a master cabinetmaker, owns and operates a custom-made cabinetry shop. He uses a normal costing system and applies overhead on the basis of direct labor cost. At the beginning of September, he had no outstanding debt and the following balances were in the general ledger:

            Cash                                         $ 16,890

            Raw Materials Inventory           $   2,150

            Supplies Inventory                   $      620

            Work in Process Inventory        $     ????

            Finished Goods Inventory         $          0            Stockholders’ Equity???

The subsidiary ledgers for work in process are as follows:

            Job                   Materials          Labor               Overhead

            A-3                   $ 750              $1,100             $ 550

            A-4                       900                    650                  325

            A-5                     325                    700                  350

-Other items of importance are:

-$1,675 of raw materials were purchased during the month

-Raw materials listed were used; A-3 $280, A-4 $350. A-5 $520, A-6 $375, A-7 $250.

-Supplies of $580 were purchased, while $490 were used.

-Direct labor was $3,460; A-3 $750, A-4 $1,300. A-5 $550, A-6 $490, A-7 $370.

-Indirect labor was $2,000.

-Overhead is applied to production; overhead is applied as 50% of direct labor cost.

-General administrative expenses for the month were $3,420.

-Jobs A-3, A-5, and A-6 were finished. A-3 and A-5 were sold for $6,125, and $1,750, respectively.

REQUIRED:

1) Prepare the balance sheet for August 31.

2) Prepare job cost sheets for all jobs A-3, A-4, A-5, A-6, A-7.

3) Show in a ledger the transactions for September.

4) Prepare cost of goods manufactured statement for September.

5) Prepare the cost of goods sold statement for September.

6) Close the over-under applied overhead to the cost of goods sold for September.

7) Prepare the income statement for September.

8) Prepare a statement of retained earnings.

9) Prepare a balance sheet for September 30.

10) Without regard to the line 6 above, assume that the over or under applied overhead is MATERIAL. Prorate the balance to the appropriate accounts.

CONSIDER THE FOLLOWING SITUATION:

Mrs. Smith had stopped by one day and asked for a price on some cabinets. Radiance studied the plan and figured cost would be:

            Lumber                        $   590

            Finishing materials              75

            Labor                                640

            Overhead                          320

            Total                            $1,625

               With markup of 15%, the price would be $1,900.

Mrs. Smith was incensed stating that a competitor down the street, Ms. Jones, quoted a price of $1,600. It is true that Radiance does not want to lay off workers during slow times. What recommendation would you make? Why?

Explanation / Answer

1..Balance Sheet as at 31, August Assets Liabilities Cash 16890 Stockholder's equity 25310 Raw materials Inventory 2150 Supplies Inventory 620 WIP inventory(A3+A4+A5) 5650 Finished Goods Inventory 0 25310 25310 2.. Job Cost Sheets A-3 A-4 A-5 A-6 A-7 Total Beginning WIP (DM+DL+OH) 2400 1875 1375 5650 Incurred During September Raw materials used 280 350 520 375 250 1775 Direct labor 750 1300 550 490 370 3460 OH 50%*DL 375 650 275 245 185 1730 Total 3805 4175 2720 1110 805 12615 4...Cost of Goods Manufactured in September Beginning WIP: A-3 2400 A-4 1875 A-5 1375 5650 Add: Raw materials used 1775 Direct labor 3460 OH applied 1730 12615 Less: Ending WIP A-4 4175 A-7 805 4980 Cost of Goods Manufactured(A-3, A-5 & A-6) 7635 5. COGS for September Beginning Finished goods 0 Add: COGM in Sep. 7635 Less: Ending Finished goodsA-6) 1110 COGS(A-3& A-5) 6525 6. Overheads incurred in Sep. Supplies 490 Ind.Labor 2000 Total 2490 OH applied 1730 So, under-applied OH=(2490-1730)= 760 COGS 760 Mfg. OH 760 So, now COGS=6525+760= 7285 7.. Income statement for September Sales (6125+1750) 7875 Less: COGS 7285 Gross Profit 590 General admn. OH 3420 Net Loss -2830 8. Statement of retained earnings Stockholder's equity 25310 Net Loss -2830 Ending Stockholder's equity 22480 4. Ledger accounts Cash Opening Balance 16890 Sales 7875 Raw materials 1675 Supplies 580 Labor 3460 Indirect labor 2000 Gen. admn,. Oh 3420 Ending Balance 13630 9..Balance Sheet as at 31, August Assets Liabilities Cash 13630 Stockholder's equity 22480 Raw materials Inventory(2150+1675-1775) 2050 Supplies Inventory(620+580-490) 710 WIP inventory(A4&A7) 4980 Finished Goods Inventory(A6) 1110 22480 22480 10..Under applied OH 760 Revised value Balances in WIP 4980 4980/12615*760= 300 5280 Fin.gds. 1110 1110/12615*760= 67 1177 COGS 6525 6525/12615*760= 393 6918 Total 12615 760 13375

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