Managerial Accounting
Managerial Accounting
16th Edition
ISBN: 9781259995484
Author: Ray Garrison
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 3, Problem 5E

Requirement1:

To determine

The Journal entries to be passed for the transactions for manufacturing the product.

Requirement1:

Expert Solution
Check Mark

Answer to Problem 5E

Solution: The Journal entries for the transactions occurred for the month of October for Polaris Company is as follows:

    IN THE BOOKS OF POLARIS COMPANY

    FOR THEOCTOBER MONTH

    S.NO.

    ACCOUNTS TITLES AND EXPLANATIONS

    DEBIT IN $

    CREDIT IN $

    a.

    Raw Material Inventory Account Dr.

    210,000

    Accounts Payable

    210,000

    (For raw material purchased on account)

    b.

    Work in Process Inventory Account Dr.

    178,000

    Manufacturing Overheads Account Dr.

    12,000

    Raw Material Inventory Account

    190,000

    (For issue of both direct anda indirect material to production)

    c.

    Work in Process Inventory Account Dr.

    90,000

    Manufacturing Overheads Account Dr.

    110,000

    Wages Payable

    200,000

    (For direct and indirect wages accrued and incurred for production)

    d.

    Manufacturing Overheads Account Dr.

    40,000

    Accumulated Depreciation-Equipment Account

    40,000

    (For depreciation charged on factory Equipment)

    e.

    Manufacturing overheads Account Dr.

    70,000

    Accrued manufacturing overheads Account

    70,000

    (For manufacturing overhead incurred during the month)

    f.

    Work in Process Inventory Account Dr.

    240,000

    Manufacturing overheads Account

    240,000

    (For manufacturing overheads applied to work in process based on machine hours)

    g.

    Finished Goods Inventory Account Dr.

    520,000

    Work in Process Inventory Account

    520,000

    (For goods completed during the month)

    h.

    Cost of Goods sold account Dr.

    480,000

    Finished Goods Inventory Account

    480,000

    (for cost of goods sold transferred from finished goods)

    Accounts Receivable Account Dr.

    600,000

    Sales Revenue Account

    600,000

    (For sales made on account)

Explanation of Solution

The explanation for each journal entry shall be made as follows:

  1. Raw material purchased increases the inventory balance and the liability.
  2. Raw material used as direct and indirect material shall be debited to work in process and manufacturing overheads account.
  3. Wages incurred shall be charged in work in process inventory for direct wages and in manufacturing overheads for indirect wages.
  4. Depreciation charged on equipment shall be indirect expense debited to manufacturing overheads.
  5. Overheads incurred during the period shall be debited to manufacturing overheads.
  6. Manufacturing overheads are applied to work in process inventory on the basis of pre-determined overhead rate and actual machine hours worked. The amount is computed as follows:

Pre-determined Overhead rate: $ 8 per machine hour

Machine hours: 30,000 machine hours

Overheads Applied: Machine hours × Pre-determined overhead rate

= 30,000 hours × $ 8.00 per machine hour= $240,000

  • Cost of goods finished during the year shall be debited to finished goods as it will lead to increase in finished goods inventory.
  • Cost of goods which have been sold will credited to finished goods as it will decrease the inventory balance and increase the cost of goods sold. The sales made on account will increase the sales revenue. The sales revenue shall be computed as under:
  • Cost of Goods sold: $480,000

    Profit Margin =25% of cost

    Gross margin= $480,000 × 25% = $120,000

    Sales Revenue = Cost of Goods sold + Gross Margin = $480,000+$120,000 = $600,000

    Requirement2:

    To determine

    The T-Accounts shall be made for manufacturing overheads and work in process account.

    Requirement2:

    Expert Solution
    Check Mark

    Answer to Problem 5E

    Solution: The T-accounts are presented as follows:

      MANUFACTURING OVERHEADS

      Raw material Inv.

      12,000

      Work in process

      240,000

      Wages Payable

      110,000

      Accumulated Depreciation

      40,000

      Accrued Overheads

      70,000

      Ending balance

      8,000

      WORK IN PROCESS INVENTORY

      Beginning Balance

      42,000

      Finished Goods Inventory

      520,000

      Raw material Inv.

      178,000

      Wages Payable

      90,000

      Manufacturing Overheads

      240,000

      Ending Balance

      30,000

    Explanation of Solution

    • The Manufacturing overheads accounts is prepared by debiting the indirect cost actually incurred during the period and credited with the amount of overheads applied during the period.
    • Work in process accounts shall be prepared by debiting the direct cost incurred and manufacturing overheads applied and credited with the amount of goods completed during the year.
    Conclusion

    To conclude, it must be said that ending manufacturing overheads represent under/over-applied overheads and Ending work in process balance represent the cost of goods still in process.

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    Managerial Accounting

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