Gold Nest Company of Guandong, China, is a family-owned enterprise that makes bi

Question

Gold 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 $75,000 of manufacturing overhead for an estimated activity level of $50,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

4,500

During the year, the following transactions were completed:

Raw materials purchased for cash, $ 163,000.

Raw materials used in production, $146,000 (materials costing $125,000 were charged directly to jobs; the remaining materials were indirect).

Cash paid to employees as follows:

44,000

Cash paid for rent during the year was $18,200 ($13,900 of this amount related to factory operations, and the remainder related to selling and administrative activities).

Cash paid for utility costs in the factory, $13,000.

Cash paid for advertising, $11,000.

Depreciation recorded on equipment, $23,000. ($15,000 of this amount related to equipment used in factory operations; the remaining $8,000 related to equipment used in selling and administrative activities.)

Manufacturing overhead cost was applied to jobs, $ ? .

Goods that had cost $228,000 to manufacture according to their job cost sheets were completed.

Sales for the year (all paid in cash) totaled $501,000. The total cost to manufacture these goods according to their job cost sheets was $220,000.

Required:

1. Prepare journal entries to record the transactions for the year. (Raw materials purchased for cash, $163,000.)

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. (Do not prepare a schedule of cost of goods manufactured; all of the information

needed for the income statement is available in the journal entries and T-accounts you have prepared.)

r

Raw materials $ 10,300 Work in process $

4,500

Finished goods $ 8,100

Explanation / Answer

1.

Predetermined overhead rate = Estimated manufacturing overheads / Estimated direct labor cost = $75000 / $50000 = 150% of direct labor cost

2.

3A. Manufacturing overheads incurred $229300 - Manufacturing overheads applied $243000 = Manufacturing overheads overapplied $13700

3B.

4.

Account Titles and Explanation Debit Credit Raw Materials 163000 Cash 163000 (To record raw materials purchased for cash) Work in process (Direct materials) 125000 Manufacturing overhead (Indirect materials) 21000 Raw Materials 146000 (To record materials requisitioned) Work in process (Direct labor) 162000 Manufacturing overhead (Indirect labor) 166400 Sales commisssions 26000 Administrative salaries 44000 Cash 398400 (To record cash paid to employees) Manufacturing overhead 13900 Rent expense 4300 Cash 18200 (To record rent paid) Manufacturing overhead 13000 Cash 13000 (To record factory utility costs paid) Advertising expense 11000 Cash 11000 (To record advertising expense paid) Manufacturing overhead 15000 Depreciation expense 8000 Accumulated depreciation-factory equipment 15000 Accumulated depreciation-S & A equipment 8000 (To record depreciation expense) Work in process (150% x $162000) 243000 Manufacturing overhead 243000 (To record manufacturing overheads applied) Finished Goods 228000 Work in process 228000 (To record goods completed and transferred to Finished goods) Cash 501000 Sales Revenue 501000 (To record cash sales) Cost of goods sold 220000 Finished goods 220000 (To record cost of sales)

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