Chapter 2, Problem 13E

To determine

Overhead:

Overheads are the cost and the expenses a company incurs of the production of a particular goods or services which are not directly related to the production. It does not include labor and direct material.

Direct Material Cost:

Direct material cost is the cost that a company incurs while manufacturing a certain product or service. It includes all the cost and expenses that are directly associated with the production such as raw materials.

Direct Labor Cost:

Direct labor cost is the cost that a company incurs in giving wages to the people that are directly associated with the production work.

Journal Entries:

Journal entries are the entries that are made in the books of accounts to record every transaction that happens in the business in the chronological order.

Accounting rules for journal entries:

• To Increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.
• To Decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.

To prepare: Journal entries.

Explanation of Solution

a.

To record purchase of raw materials.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Work in process		90,000
	Direct material			90,000
	(To record raw materials used in production)
Table (1)

• Work in process is an asset. This account increases as the cost is directly related to production, its value increases. Hence it is debited.
• Direct material is an expense account. The account is directly related to production, hence it is credited.

b.

To record raw materials used in production.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Work in process		36,500
	Direct material			36,500
	(To record raw materials used in production)
Table (2)

• Work in process is an asset. This account increases as the cost is directly related to production, its value increases. Hence it is debited.
• Direct material is an expense account. The account is directly related to production, hence it is credited.

To record indirect materials.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Factory Overhead		19,200
	Direct material			19,200
	(To record factory overhead used in production)
Table (3)

• Factory overhead is an expense account. The account increases as it is indirect expenses and all the expenses and losses are always debited.
• Direct material is an expense account. The account is directly related to production, hence it is credited.

c.

To record the entry for factory wages.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Work in process		38,000
	Direct Labor			38,000
	(To record direct labor used in production)
Table (4)

• Work in process is an asset. This account increases as the cost of the labor is directly related to production, its value increases. Hence it is debited.
• Direct labor is an expense account. The account is directly related to production, hence it is credited and cost is allocated to work in process.

To record indirect labor

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Factory overhead		12,000
	Direct Labor			12,000
	(To record direct labor used in production)
Table (5)

• Factory overhead is an expense account. The account increases as it is indirect expenses and all the expenses and losses are always debited.
• Direct labor is an expense account. The account is directly related to production, hence it is credited and cost is allocated to work in process.

d.

To record cash paid for overhead cost.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Factory overhead		11,475
	Cash			11,475
	(To record cash paid for overhead)
Table (6)

• Factory overhead is an expense account. The account increases as it is indirect expense and expenses are being paid, hence it is debited.
• Cash is an asset account. Cash account increases as the amount has been paid for factory overhead in cash, hence asset decreases and all assets are credited as their values decrease.

e.

To record applied overhead.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Work in process		47,500
	Overhead			47,500
	(To record overhead used in production)
Table (7)

• Work in process is an asset. This account increases as the cost of the overhead is directly related to production, its value increases. Hence it is debited.
• Overhead is an expense account. The account is directly related to production, hence it is credited and cost is allocated to work in process.

Working notes:

Given,
Direct labor is $38,000.
Overhead rate is 125%.

Computation of overhead,

$\begin{array}{c}\text{Overhead}=\text{Direct}\text{Labor}\times \text{Overhead}\text{rate}\\ =\$38,000\times 125\%\\ =\$47,500\end{array}$ $$

Overhead applied is $47,500.

f.

To record transfer of jobs to finished goods.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Finished goods		56,800
	Work in process			56,800
	(To record Transfer of jobs to finished goods)
Table (8)

• Finished goods are an asset account. Finished goods account balance increases as the goods are transferred to this account; hence asset increases and all the assets are debited as their values decreases.
• Work in process is an asset account. This account decreases as their goods are being transferred from work in process accounts, hence the asset decreases and all the assets are credited as their values decrease.

g.

To record cost of goods sold.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Cost of goods sold		56,800
	Finished goods inventory			56,800
	(To record sale of job 120)
Table (9)

• Cost of goods sold is an expense account. The balance of the cost of goods sold increases, hence it is credited.
• Finished goods are an asset account. The account decreases as the goods are sold and inventory decreases, hence asset decreases and all assets are credited as their values decreases.

To record sale

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Accounts Receivable		82,000
	Sales Revenue			82,000
	(To record sale)
Table (10)

• Accounts receivable is an asset. Account receivable increase as sale has been made on credit, hence debtors increase and all the assets are debited as their value increases.
• Sales revenue is an income account. The balance increases and all the incomes and gains are credited.