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Hepworth Company has implemented a JIT system and is considering the use of backflush costing. Hepworth had the following transactions for the current fiscal year: 1. Purchased raw materials on account for $600,000. 2. Placed all materials received into production. 3. Incurred actual direct labor costs of $90,000. 4. Incurred actual overhead costs of $625,000. 5. Applied conversion costs of $675,000. 6. Completed all work for the month. 7. Sold all completed work. 8. Computed the difference between actual and applied costs. Required: 1. Prepare the journal entries for traditional and backflush costing. For backflush costing, assume there are two trigger points: (1) the purchase of raw materials, and (2) the completion of the goods. 2. Assume the second trigger point in Requirement 1 is the sale of goods. What would change for the backflush-costing journal entries? 3. What if there is only one trigger point and it is (a) completion of the goods or (b) sale of the goods? How would the backflush-costing journal entries differ from Requirement 1 for (a) and (b)?

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 11, Problem 5CE
Textbook Problem
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Hepworth Company has implemented a JIT system and is considering the use of backflush costing. Hepworth had the following transactions for the current fiscal year:

  1. 1. Purchased raw materials on account for $600,000.
  2. 2. Placed all materials received into production.
  3. 3. Incurred actual direct labor costs of $90,000.
  4. 4. Incurred actual overhead costs of $625,000.
  5. 5. Applied conversion costs of $675,000.
  6. 6. Completed all work for the month.
  7. 7. Sold all completed work.
  8. 8. Computed the difference between actual and applied costs.

Required:

  1. 1. Prepare the journal entries for traditional and backflush costing. For backflush costing, assume there are two trigger points: (1) the purchase of raw materials, and (2) the completion of the goods.
  2. 2. Assume the second trigger point in Requirement 1 is the sale of goods. What would change for the backflush-costing journal entries?
  3. 3. What if there is only one trigger point and it is (a) completion of the goods or (b) sale of the goods? How would the backflush-costing journal entries differ from Requirement 1 for (a) and (b)?

1.

To determine

Prepare journal entries for traditional and back flush costing.

Explanation of Solution

Back flush costing: Back flush costing is a simplified approach for cost flow accounting that uses trigger points to determine when manufacturing costs are assigned to key inventory and temporary accounts.

Traditional cost system: Traditional cost system is a cost accounting system that uses only unit based activity drivers to assign costs to cost objects.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Traditional journal entries:

1. Prepare journal entry to record the purchase of raw materials.

DateAccounts and ExplanationDebit ($)Credit ($)
Material inventory600,000 
       Accounts payable 600,000
(To record the raw materials purchased)  

Table (1)

Description:

  • Material inventory is an asset account and it is increased. Therefore, debit the material inventory.
  • Accounts payable is a liability account and it is increased. Therefore, credit the accounts payable.

2. Prepare journal entry to record the materials issued to production.

DateAccounts and ExplanationDebit ($)Credit ($)
Work-in-Process Inventory600,000 
      Materials Inventory 600,000
(To record the materials issued to production)  

Table (2)

Description:

  • Work-in-process is a component of inventory account, which is reflected in asset account and it is increased. Therefore, debit the Work-in-process inventory.
  • Material inventory is an asset account and it is decreased. Therefore, credit the material inventory.

3. Prepare journal entry to record direct labor cost incurred.

DateAccounts and ExplanationDebit ($)Credit ($)
Work-in-Process Inventory90,000 
      Wages payable 90,000
(To record the direct labor cost incurred)  

Table (3)

Description:

  • Work-in-process is a component of inventory account, which is reflected in asset account and it is increased. Therefore, debit the Work-in-process inventory.
  • Wages payable is a liability account and it is increased. Therefore, credit the wages payable.

4. Prepare journal entry to record the overhead cost incurred.

DateAccounts and ExplanationDebit ($)Credit ($)
Overhead Control625,000 
       Accounts Payable 625,000
(To record the overhead cost incurred)  

Table (4)

Description:

  • Overhead Control is an expense account and it is increased. Therefore, debit the overhead control.
  • Accounts payable is a liability account and it is increased. Therefore, credit the accounts payable.

5. Prepare journal entry to record application of overhead.

DateAccounts and ExplanationDebit ($)Credit ($)
Work-in-Process Inventory585,000 
      Overhead Control 585,000
(To record the application of  overhead)  

Table (5)

Description:

  • Work-in-process is a component of inventory account, which is reflected in asset account and it is increased. Therefore, debit the Work-in-process inventory.
  • Overhead Control is an expense account and it is decreased. Therefore, credit the overhead control.

6. Prepare journal entry to record completion of goods.

DateAccounts and ExplanationDebit ($)Credit ($)
Finished Goods Inventory1,275,000 
      Work-in-Process Inventory 1,275,000
(To record the completion of goods)  

Table (6)

Description:

  • Finished Goods Inventory is an asset account and it is increased. Therefore, debit the finished goods inventory.
  • Work-in-process is a component of inventory account, which is reflected in asset account and it is decreased. Therefore, credit the Work-in-process inventory.

7. Prepare journal entry to record cost of goods sold.

DateAccounts and ExplanationDebit ($)Credit ($)
Cost of Goods Sold1,275,000 
       Finished Goods Inventory 1,275,000
(To record the cost of goods sold)  

Table (7)

Description:

  • Cost of goods sold is an expenses and it is increased...

2.

To determine

Show the changes for the back flush costing journal entries, if the second trigger point in requirement 1 is the sale of goods.

3.

To determine

Prepare journal entry showing how the back flush-costing journal entries differ from Requirement 1 for completion of the goods or sale of the goods, if there is only one trigger point.

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Chapter 11 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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