Gold Nest Company of Guandong, China, is a family-ownedenterprise that makes birdcages for the South China market. Thecompany sells its birdcages through an extensive network of streetvendors who receive commissions on their sales.
The company uses a job-order costing system in which overhead isapplied to jobs on the basis of direct labor cost. Itspredetermined overhead rate is based on a cost formula thatestimated $330,000 of manufacturing overhead for an estimatedactivity level of $200,000 direct labor dollars. At the beginningof the year, the inventory balances were as follows:
| | |
| Rawmaterials | $ | 25,000 |
| Work inprocess | $ | 10,000 |
| Finishedgoods | $ | 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 materialswere indirect).
- Costs for employee services were incurred as follows:
| | |
| Direct labor | $ | 180,000 |
| Indirectlabor | $ | 72,000 |
| Salescommissions | $ | 63,000 |
| Administrativesalaries | $ | 90,000 |
|
- Rent for the year was $18,000 ($13,000 of this amountrelated to factory operations, and the remainder related to sellingand administrative activities).
- Utility costs incurred in the factory, $57,000.
- Advertising costs incurred, $140,000.
- Depreciation recorded on equipment, $100,000. ($88,000 of thisamount related to equipment used in factory operations; theremaining $12,000 related to equipment used in selling andadministrative activities.)
- Record the manufacturing overhead cost applied to jobs.
- Goods that had cost $675,000 to manufacture according to theirjob cost sheets were completed.
- Sales for the year (all paid in cash) totaled $1,250,000. Thetotal cost to manufacture these goods according to their job costsheets was $700,000.
Required:
1. Prepare journal entries to record the transactions for theyear.
2. Prepare T-accounts for each inventory account, ManufacturingOverhead, and Cost of Goods Sold. Post relevant data from yourjournal entries to these T-accounts (don’t forget to enter thebeginning balances in your inventory accounts).
3A. Is Manufacturing Overhead underapplied or overapplied forthe year?
3B. Prepare a journal entry to close any balance in theManufacturing Overhead account to Cost of Goods Sold.
4. Prepare an income statement for the year. (All of theinformation needed for the income statement is available in thejournal entries and T-accounts you have prepared.)
