Chapter 3, Problem 15P

Journal Entries; T-Accounts; Financial Statements L03-1, 103-2, 103-3, L03-4
Froya Fabrikker A/S of Bergen : is a small comp.' that manufactures specialty heavy equipment for use in North Sea oil fields. The company uses a job-order costing system that applies manufacturing overhead cost to jobs on the basis of direct labor-hours. It’s predetermined overhead rate based on a cost formula that estimated $360,000 of manufacturing overhead for an estimated allocation base of 900 direct labor-hours. The following transactions took place during the year:
a. Raw materials purchased on account. $200.000.
b. Raw materials used in production (all direct materials), $185,000.
c. Utility bills incurred on account: S70, 000 (90% related to factory operations, and the remainder related to selling and administrative activities).

d. Accrued salary and wage costs:

e. Maintenance costs incurred on account in the factory, $54.000.
f. Advertising costs incurred on account $136.000.
g. Depreciation was recorded for the year, $95,000 (80% elated to factory equipment, and the remainder related to selling and administrative equipment).
h. Rental cost incurred on account, $120.000 (85% related to factory facilities. and the remainder related to selling andadministrative facilities)
i. Manufacturing overhead cost was applied to jobs, $ ?
j. Cost of goods manufactured for the year, $770,000.
k.Sales for the you (all on account) to totaled $1,200.000. These goods cost $800,000 according to their job cost sheets.
k. The balances in the mentor’s accounts at the beginning of the year were:

Required:

1. Prepare journal entries to record the preceding transactions.
2. Post your entry to T-account (Don’t forget to enter the beginning inventory balance above.) Determine the ending balance in the inventory account and in the Manufacturing overhead account.
3. Prepare a schedule of cost of goods manufactured.
4. Prepare a journal to close any balance in the Manufacturing Overhead account to Cost of Goods Sold. Prepare a schedule of cost of goods sold
5. Prepare an income statement for the year.

To determine

Concept Introduction:

Fixed and Variable Costs in Manufacturing:

• Variable costs refer to the costs of manufacture that have a direct co-relation with the volume of the goods manufactured, i.e. the costs increase with an increase in the goods produced.

• Examples are costs of direct material and direct labor.

• Fixed costs refer to the costs of manufacture that have an inverse co-relation with the volume of the goods manufactured, i.e. the costs decrease with an increase in the goods produced.

• Examples are costs of factory rent, depreciation on plant and equipment

• Manufacturing costs are costs that are directly incurred in connection with manufacture of goods.

• Examples are Direct materials and Manufacturing Overhead

Journal Entries

• Journal entries are the first step in recording financial transactions and preparation of financial statements.

• These represent the impact of the financial transaction and demonstrate the effect on the accounts impacted in the form of debits and credits.

• Assets and expenses have debit balances and Liabilities and Incomes have credit balances

To Prepare:

Journal Entries to record transactions.

Explanation of Solution

Transaction	Particulars	Debit ($)	Credit ($)
a	Raw Materials	$ 200,000
	Accounts Payables		$ 200,000
	(Being raw materials purchased on account)
b	Work in Process	$ 185,000
	Raw Materials		$ 185,000
	(Being raw materials used in production)
c	Manufacturing Overhead	$ 63,000
	Utility Expense	$ 7,000
	Accounts Payables		$ 70,000
	(Being Utility expenses relating to factory and selling and administrative expenses, distributed 90% to Factory and rest to selling and administrative activities)
d	Work in Process	$ 230,000
	Manufacturing Overhead	$ 90,000
	Salaries Expenses	$ 110,000
	Salaries and Wages Payable		$ 430,000
	(Being accrued Salaries and wages payable)
e	Manufacturing Overhead	$ 54,000
	Accounts Payables		$ 54,000
	(Being Maintenance expenses incurred on account)
f	Advertising Expenses	$ 136,000
	Accounts Payables		$ 136,000
	(Being Advertising expenses incurred on account)
g	Manufacturing Overhead	$ 76,000
	Depreciation Expense	$ 19,000
	Accumulated Depreciation		$ 95,000
	(Being depreciation relating to factory equipment and selling and administrative equipment, distributed 80% to Factory equipment and rest to selling and administrative equipment)
h	Manufacturing Overhead	$ 102,000
	Rent Expense	$ 18,000
	Accounts Payables		$ 120,000
	(Being Rent expenses relating to factory facilities and selling and administrative facilities , distributed 85% to Factory facilities and rest to selling and administrative facilities)
i	Work in Process	$ 390,000
	Manufacturing Overhead		$ 390,000
	(Being overhead applied at a pre-determined rate of $400 per direct labor hour for 975 Labor Hours, resulting in over application of overhead)
j	Finished Goods Inventory	$ 770,000
	Work in Process		$ 770,000
	(Being Cost of goods manufactured calculated by transferring the Work in Process)
k	Accounts Receivable	$ 1,200,000
	Sales		$ 1,200,000
	(Being Sales recorded)
	Cost of Goods Sold	$ 800,000
	Finished Goods		$ 800,000
	(Being Cost of Goods sold recorded)

• In case of Asset and Expenses accounts, the opening balance will be Debit Balance and in case of Liabilities and Incomes accounts, the opening balance is Credit Balance.

• Examples of Assets and Expenses −
Assets - Raw Materials, Work In process, Finished Goods, Accounts Receivable

Expenses - Manufacturing Overhead, Salary Expenses, Advertising Expenses, Rent Expenses, and Cost of Goods sold

• Examples of Liabilities and Incomes -
Liabilities − Accounts Payable, Salaries Payable

Incomes - Sales

• In order to increase balances of Asset and Expenses accounts, they are debited and in order to decrease the balances, they are credited

• In order to increase balances of Liability and Income accounts, they are credited and in order to decrease the balances, they are debited.

Explanations for the journal entries are as follows:

• Raw Materials

  will be debited by $ 200,000 and Accounts Payables will be credited since raw materials purchased on account

• Work in Process will be debited by $ 185,000 and Raw Materials will be credited since raw materials used in production

• Manufacturing Overhead will be debited by $ 63,000 , Utility Expense will be debited by $ 7,000 and Accounts Payables will be credited by $70, 000 since Utility expenses relating to factory and selling and administrative expenses are distributed 90% to Factory and rest to selling and administrative activities

• Work In Process will be debited by $ 230,000, Manufacturing Overhead will be debited by $ 90,000, Salaries Expenses will be debited by $ 110,000 Factory Wages Payable will be credited since accrued Salaries and wages are payable

• Manufacturing Overhead will be debited by $ 54,000 and Accounts Payables will be credited since Maintenance expenses incurred on account

• Advertising Expenses will be debited by $ 136,000 and Accounts Payables will be credited since Advertising expenses incurred on account

• Manufacturing Overhead will be debited by $ 76,000, Depreciation Expense will be debited by $ 19,000 and Accumulated Depreciation will be credited since depreciation relating to factory equipment and selling and administrative equipment is distributed 80% to Factory equipment and rest to depreciation expense

• Manufacturing Overhead will be debited by $ 102,000 , Rent Expense will be debited by $ 18,000 and Accounts Payables will be credited since Rent expenses relating to factory facilities and selling and administrative facilities is distributed 85% to Factory facilities and rest to selling and administrative facilities

• Work in Process will be debited by $ 390,000 and Manufacturing Overhead will be credited since overhead applied at a pre-determined rate of $400 per direct labor hour for 975 Labor Hours, resulting in over application of overhead

• Finished Goods Inventory will be debited by $ 770,000, Work in Process will be credited by since Cost of goods manufactured calculated by transferring Work in Process.

• Accounts Receivable will be debited by $ 1,200,000 and Sales will be credited since Sales on account are recorded.

• Cost of Goods Sold will be debited by $ 800,000 and Finished Goods will be credited since Cost of Goods sold are recorded

Hence, the transactions are journalized and entries are recorded.

To determine

Concept Introduction:

T-Accounts

• T-Accounts are a graphical representation of the postings made to the accounts during a reporting period.

• The left side records the debit entries and the right side records the credit entries of an account.

• Depending on the nature of the account i.e. Balance Sheet or Profit and Loss Account, Income or Expense account etc. the account balances are reflected.

• In case of Asset and Expenses accounts, the opening balance will be Debit Balance and in case of Liabilities and Incomes accounts, the opening balance is Credit Balance.

• They help in analysis of the transactions impacting the accounts.

To Prepare:

T-Accounts for Inventory and Manufacturing Overhead and compute closing Balances

Explanation of Solution

Dr.	Raw Materials	Cr.
Transaction	Particulars	Amount ($)	Transaction	Particulars	Amount ($)
	Opening Balance	$ 30,000.00	b	Work in Process	$ 185,000.00
A	Accounts Payables	$ 200,000.00
	Balance	$ 45,000.00
Dr.	Work In Process				Cr.
Transaction	Particulars	Amount ($)	Transaction	Particulars	Amount ($)
	Opening Balance	$ 21,000.00	j	Finished Goods	$ 770,000.00
I	Manufacturing Overhead	$ 390,000.00
B	Raw Materials	$ 185,000.00
D	Salaries and Wages Payable	$ 230,000.00
	Balance	$ 56,000.00
Dr.	Finished Goods				Cr.
Transaction	Particulars	Amount ($)	Transaction	Particulars	Amount ($)
	Opening Balance	$ 60,000.00	k	Cost of Goods Sold	$ 800,000.00
J	Work in Process	$ 770,000.00
	Balance	$ 30,000.00

Dr.	Manufacturing Overhead				Cr.
Transaction	Particulars	Amount ($)	Transaction	Particulars	Amount ($)
C	Accounts Payables	$ 63,000.00	i	Work in process	$ 390,000.00
D	Salaries and Wages Payable	$ 90,000.00
E	Accounts Payables	$ 54,000.00
G	Accumulated Depreciation	$ 76,000.00
H	Accounts Payables	$ 102,000.00
				Balance	$ 5,000.00

• Raw Materials

  will be debited by $ 200,000 and Accounts Payables will be credited since raw materials purchased on account

• Work in Process will be debited by $ 185,000 and Raw Materials will be credited since raw materials used in production

• Manufacturing Overhead will be debited by $ 63,000 , Utility Expense will be debited by $ 7,000 and Accounts Payables will be credited by $70, 000 since Utility expenses relating to factory and selling and administrative expenses are distributed 90% to Factory and rest to selling and administrative activities

• Work In Process will be debited by $ 230,000, Manufacturing Overhead will be debited by $ 90,000, Salaries Expenses will be debited by $ 110,000 Factory Wages Payable will be credited since accrued Salaries and wages are payable

• Manufacturing Overhead will be debited by $ 54,000 and Accounts Payables will be credited since Maintenance expenses incurred on account

• Manufacturing Overhead will be debited by $ 76,000 and Accumulated Depreciation will be credited since depreciation relating to factory equipment and selling and administrative equipment is distributed 80% to Factory equipment and rest to depreciation expense

• Manufacturing Overhead will be debited by $ 102,000 and Accounts Payables will be credited since Rent expenses relating to factory facilities and selling and administrative facilities is distributed 85% to Factory facilities and rest to selling and administrative facilities

• Work in Process will be debited by $ 390,000 and Manufacturing Overhead will be credited since overhead applied at a pre-determined rate of $400 per direct labor hour for 975 Labor Hours, resulting in over application of overhead

• Finished Goods Inventory will be debited by $ 770,000, Work in Process will be credited by since Cost of goods manufactured calculated by transferring Work in Process.

Hence,the closing balances are computed and T-Accounts have been prepared.

To determine

Concept Introduction:

Schedule of Cost of Goods Manufactured:

• The Schedule of Cost of Goods Manufactured is used to compute the cost of producing goods for a particular period.

• It comprises of Cost of Materials, Labor and Overhead attributable to goods manufactured.

• Cost of goods manufactured is the total cost of producing goods that are later sold to realize revenues. It includes direct and indirect materials, labor and overhead.

To Prepare:

Schedule of Cost of Goods Manufactured

Explanation of Solution

Direct Materials Used:
Beginning Materials Inventory	30,000
Add: Cost of Raw Materials Purchased	200,000
Total Raw Materials Available	230,000
Less: Closing Materials Inventory	(45,000)
Total Raw Materials Used	185,000
Direct Labor	230,000
Manufacturing Overhead
Indirect Labor	90,000
Rent	102,000
Utilities	63,000
Depreciation	76,000
Maintainance Expenses	54,000
Total Manufacturing Overhead	385,000
Total Manufacturing Costs		800,000
Add: Beginning Work In Progress Inventory		21,000
Less: Closing Work In Progress Inventory		56,000
Cost Of Goods Manufactured		765,000

• The cost of goods manufactured is a sum of the direct material, labor and manufacturing overhead attributable to the product.

• The direct material is calculated by adding the beginning raw materials inventory to the cost of raw materials purchased and reducing the balance of ending raw materials inventory.

• The opening and closing balances of Raw materials along with the cost of purchases are given. These are used to calculate the cost of material consumed.

• Direct labor and Manufacturing Overhead are also calculated. These along with cost of materials help in ascertaining the total manufacturing costs.

• Manufacturing overhead is considered at actuals and not at the rate of application of overhead.

• The opening and closing balance of Work in progress are given.

• The cost of manufacturing goods is calculated by adding the beginning Work in progress inventory to the cost of material, labor and overhead and reducing the balance of ending Work in progress inventory.

Hence, the cost of goods manufactured is $765,000.

To determine

Concept Introduction:

Application of Overhead

• Overhead refers to the various types of costs associated with the costs of production.

• These can include direct over heads such as factory rent, factory electricity expenses etc or indirect overheads such as depreciation, insurance expenses etc.

• The application of overhead means allocation of costs of production that are attributable to the goods manufactured in a fixed proportion or method of allocation.

• The difference between the actual manufacturing overhead and the applied manufacturing overhead is the under application or over application of overhead.

Journal Entries

• Journal entries are the first step in recording financial transactions and preparation of financial statements.

• These represent the impact of the financial transaction and demonstrate the effect on the accounts impacted in the form of debits and credits.

• Assets and expenses have debit balances and Liabilities and Incomes have credit balances

Cost of Goods Sold

• The Schedule of Cost of Goods sold is used to compute the cost of goods sold in a particular period.

• Cost of goods sold comprises of the cost of

  Goods manufactured along with the effect of the change in inventory of the finished goods.

• The cost of goods manufactured is a sum of the direct material, labor and manufacturing overhead attributable to the product.

To Compute:

Cost of Goods Sold and close balance of Manufacturing Overhead by passing suitable journal entries

Explanation of Solution

Date	Particulars	Debit ($)	Credit ($)
12.31.18	Manufacturing Overhead	5,000
	Cost of Goods Sold		5,000
	(Being Over applied overhead closed to Cost of Goods Sold)

Schedule of Cost Of Goods Sold
Beginning Finished Goods Inventory	60,000
Cost of Goods Manufactured	765,000
Total Goods Available for Sale	825,000
Ending Finished Goods Inventory	30,000
Overapplied Overhead	5,000
Cost of Goods Sold	800,000

• The application of overhead to work in progress in a pre-determined rate often results in under or over absorption of the overhead.

• The difference between the applied overhead and the actual overhead is the under or over application of the overhead.

• When the actual overhead is greater than the applied overhead, it results in under application of the manufacturing overhead.

• When the actual overhead is less than the applied overhead, it results in over application of the manufacturing overhead.

• Over applied overhead is a favorable variance since it results in a lower than expected cost of goods sold.

• The cost of Goods sold is calculated by adding the beginning finished goods inventory to the cost of goods manufactured and reducing the balance of ending finished goods inventory.

• The cost of goods manufactured is a sum of the direct material, labor and manufacturing overhead attributable to the product.

• The opening and closing balances of finished goods inventory are given in the question. These are used to ascertain the actual cost of goods sold.

• The over applied Manufacturing Overhead is transferred to the cost of goods sold and it is calculated accordingly

Hence, the transaction of transferring the manufacturing overhead balance to cost of goods sold is journalized and the cost of goods sold is $ 800,000.

To determine

Concept Introduction:

Income Statement:

• Income Statement is a record of the revenues goods sold, expenses of direct and indirect nature, and the change in inventory.

• The difference between the revenues and expenses is the profit or loss for the reporting period.

• The profit or loss for the period is transferred to the Balance Sheet.

To Prepare:

Income Statement for the year

Explanation of Solution

Income Statement
Sales		1,200,000
Cost of Goods Sold
Beginning Finished Goods Inventory	60,000
Cost of Goods Manufactured	765,000
Total Goods Available for Sale	825,000
Ending Finished Goods Inventory	30,000
Over applied Overhead	5,000
Cost of Goods Sold	800,000
Gross Profit		400,000
Operating Expenses
Selling and Administrative Expenses
Utilities	7,000
Salaries and Wages	110,000
Depreciation	19,000
Rental Cost	18,000
Advertising Expenses	136,000
Total Operating Expenses		290,000
Income From Operations		110,000

• The Income statement is a record of the various expenses such as cost of goods manufactured, and revenues such as sales revenue.

• Income from operations is calculated as $110,000. This is the difference between the Gross Profit and the Operating Expenses.

• Selling and Administrative Expenses of $ 290,000 are calculated based on the various transactions occurring during the reporting period. These constitute the Total Operating Expenses.

• The difference of Net Income from Sales and Total Cost of Goods Sold is the Gross Profit.

• The Cost of Goods Sold is given as $800,000.

• The ending finished goods inventory is calculated as a difference of the Cost of Goods sold and the Cost of Goods available for Sale.

• The beginning finished goods inventory is given as $60,000. Sales of $ 1,200,000 are given.

• The cost of Goods sold is calculated by adding the beginning finished goods inventory

Hence, Income Statement has been prepared and the net income from operations is $110,000.