Chapter 20, Problem 20CP

1.

To determine

Prepare journal entries to record the transactions occurred in the month of July.

Explanation of Solution

Process Costing: Process costing is method of cost accounting in which all the costs that are incurred production process are recorded. Output of one process becomes input for next process. This method is used to apply cot to similar products that are mass-produced in uninterrupted manner.

Prepare journal entries.

Date	Account title and explanation	Post. Ref.	Amount $
			Debit	Credit
July
a.	Raw Materials Inventory		125,000
	Cash			125,000
	(To record the purchase of raw materials for cash.)
b.	Work in Process Inventory		52,440
	Factory Overhead		10,000
	Raw Materials Inventory			62,440
	(To record the use of direct and indirect raw materials.)
c.	Work in Process Inventory		202,250
	Factory Overhead		25,000
	Factory Payroll Payable			227,250
	(To record the direct and indirect labor.)
d.	Factory Payroll Payable		227,250
	Cash			227,250
	(To record the payment of factory payroll with cash.)
e.	Factory Overhead		80,000
	Cash			80,000
	(To record the payment of other overhead with cash.)
f.	Work in Process Inventory		101,125
	Factory Overhead			101,125
	(To record the allocated overhead at 50% of direct labor.)

Table (1)

a. To record the purchase of raw materials for cash:

• Work in process inventory is a current asset account and it is increased by $125,000. Thus it, is debited.
• Cash is a current asset account and it is decreased by $125,000. Thus it, is credited.

  .

b. To record the use of direct and indirect raw materials:

• Work in process inventory is a current asset, and it is increased. Therefore, debit work in process inventory account for $52,440.
• Factory overhead is an expense account, and it is increased. Thus it, is debited with $10,000.
• Raw materials inventory is an asset account and it is decreased by $120,000. Thus it, is credited with $62,440.

c. To record the direct and indirect labor:

• Work in process inventory is a current asset, and it is increased. Therefore, debit work in process inventory account for $202,250.
• Factory overhead is an expense account, and it is decreased by $25,000. Thus it, is debited.
• Factory payroll payable is a liability account and it is increased by $227,250. Thus it, is credited.

d. To record the payment of factory payroll with cash:

• Factory payroll payable is a liability account and it is decreased by $227,250. Thus it, is debited.
• Cash is an asset account and it is decreased by $227,250. Thus it, is credited.

e. To record the payment of other overhead with cash:

• Factory overhead is a component of stockholders’ equity, and it is decreased by $80,000. Thus it, is debited.
• Cash is an asset account and it is decreased by $80,000. Thus it, is credited.

f. To record the allocated overhead at 50% of direct labor:

• Work in process inventory is a current asset, and it is increased. Therefore, debit work in process inventory account for $101,125 (Refer working note 1).
• Factory overhead is a component of stockholders’ equity, and it is increased. Therefore, credit factory overhead account for $101,125 (Refer working note 1).

Working note:

(1) Determine the amount of factory overhead allocated.

Given, the Allocated factory overhead production at 50$ of direct labor costs.

$\begin{array}{c}\text{Allocated factory overhead}=\text{Direct labor costs }\times \text{Percentage rate}\\ \text{=\$202,250}\times \frac{50}{100}\\ =\$101,125\end{array}$

2.

To determine

Prepare a process cost summary.

Explanation of Solution

Process cost summary: Process cost summary is prepared separately for each production department or for each process. A process cost summary describes the costs charged to each department, determines the costs assigned to each department outputs and reports the equivalent units of production achieved by each department. It is also known as production report.

Prepare process cost summary for Company ML using weighted average method.

Company ML
Process Cost Summary – Weighted average method
For Month Ended July 31
Costs Charged to Production
Particulars	Amount	Amount
Costs of beginning work in process
Direct material	$2,660
Conversion	$5,475	$8,135
Costs incurred this period
Direct materials	$52,440
Conversion	$303,375	$355,815
Total costs to account for		$363,950
Unit cost information		(In Units)
Units to account for
Beginning work in process		5,000
Units started this period		14,000
Total units to account for		19,000
Units accounted for
Completed & transferred out		11,000
Ending work in process		8,000
Total units accounted for		19,000
Equivalent units of production	Direct Materials (EUP)	Conversion (EUP)
Units completed and transferred out	11,000	11,000
Ending work in process	8,000	3,200
Equivalent units of production	19,000	14,200
Cost per EUP	Direct Materials	Conversion
Cost of beginning work in process	$2,660	$5,475
Cost incurred during this period	$52,440	$303,375
Total cost (A)	$55,100	$308,850
Equivalent units of production (B)	19,000	14,200
Cost per EUP (C)$\left(\text{A}\right)÷\left(\text{B}\right)$	$2.90 per EUP	$21.75 per EUP
Cost assignment and reconciliation
Particulars	Amount	Amount
Cost transferred out
Direct materials	$31,900
Conversion	$239,250	$271,150
Costs of ending work in process
Direct materials	$23,200
Conversion	$69,600	$92,800
Total costs accounted for		$363,950

Table (2)

3.

To determine

Prepare journal entries using the calculations made in requirement 2.

Explanation of Solution

Process Costing: Process costing is method of cost accounting in which all the costs that are incurred production process are recorded. Output of one process becomes input for next process. This method is used to apply cot to similar products that are mass-produced in uninterrupted manner.

Prepare journal entries.

Date	Account title and explanation	Post. Ref.	Amount $
			Debit	Credit
July
g.	Finished goods Inventory		271,150
	Work in Process Inventory			271,150
	(To record the transfer of finished goods.)
h.	Cash		625,000
	Sales revenue			625,000
	(To record the cash sales.)
	Cost of goods sold		265,700
	Raw Materials Inventory			265,700
	(To record the cost of goods sold.)

Table (3)

g. To record the transfer of finished goods:

• Finished goods inventory is an asset account. Transfer of units to finished goods inventory from production increases the asset account by $271,150. Thus it, is debited.
• Work in process inventory is an asset account. Transfer of units from production to finished goods inventory decreases the asset account by $271,150. Thus it, is credited.

h. To record the sale of goods:

• Cash is a current asset account and it is increased by $625,000. Thus it, is debited.
• Sales revenue is a component of stockholders’ equity, and it is increased. Therefore, credit sales revenue account for $625,000.

  To record the cost of goods sold:

• Cost of goods sold is a component of stockholders’ equity, and it is decreased. Therefore, it is debited with $265,700.
• Finished goods inventory is an asset account. Sale of finished goods decreases the asset account with $265,700. Thus it, is credited.

4.

To determine

Post entries from Requirement 1 and 3 to the ledger accounts.

Explanation of Solution

General ledger: General ledger is a record of all accounts of assets, liabilities, and stockholders’ equity, necessary to prepare financial statements.

Prepare ledger accounts and post the transactions.

Raw Materials Inventory				Acct. No. 132
Date		Debit	Credit	Balance
June 30	Balance			$25,000
(a)	Purchases	$125,000		$150,000
(b)	Usage		$62,440	$87,560

Table (4)

Work in Process Inventory				Acct. No. 133
Date		Debit	Credit	Balance
June 30	Balance			$8,135
(b)	Direct materials	52,440		$60,575
(c)	Direct labor	$202,250		$262,825
(f)	Overhead allocation	$101,125		$363,950
(g)	Transfer to Finished  Goods		$271,150	$92,800

Table (5)

Finished Goods Inventory				Acct. No. 135
Date		Debit	Credit	Balance
June 30	Balance			$110,000
(g)	Transfer in from production	$271,150		$381,150
(h)	July sales		$265,700	$115,450

Table (6)

Factory Payroll Payable				Acct. No. 212
Date		Debit	Credit	Balance
(c)	Direct labor		$202,500	$202,500
(c)	Indirect labor		$25,000	$227,250
(d)	Payment		$227,250	$0

Table (7)

Sales				Acct. No. 413
Date		Debit	Credit	Balance
(h)	July sales		$625,000	$625,000

Table (8)

Cost of Goods Sold				Acct. No. 502
Date		Debit	Credit	Balance
(h)	July sales	$265,700		$265,700

Table (9)

Factory Overhead				Acct. No. 540
Date		Debit	Credit	Balance
(b)	Indirect materials	$10,000		$10,000
(c)	Indirect labor	$25,000		$35,000
(e)	Other overhead costs	$80,000		$115,000
(f)	Overhead application (Refer Working Note 1)		$101,125	$13,875

Table (10)

5.

To determine

Compute the amount of gross profit from the sales in July.

Explanation of Solution

Gross margin (gross profit): Gross margin is the amount of revenue earned from goods sold over the costs incurred for the goods sold.

Compute the amount of gross profit from the sales in July.

Computation of gross margin
Particulars	Amount
Sales	$625,000
Less: Cost of goods sold (Refer Working Note 2)	($279,575)
Gross profit	$345,425

Table (11)

Working note:

(2) Determine the cost of goods sold:

$\begin{array}{c}\text{Total Cost of goods sold}=\text{Cost of goods sold}+\text{ Under applied overhead}\\ \text{=\$265,700}+\$13,875\\ =\$279,575\end{array}$