Chapter 4, Problem 46P

1.

To determine

Calculate predetermined factory overhead rate.

Explanation of Solution

Predetermined factory overhead rate: Factory overhead cost are applied or allocated to cost of job based on predetermined factory overhead rate.

Cost of goods sold: Cost of goods sold is the total of all the expenses incurred by a company to sell the goods during the given period.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Calculate predetermined factory overhead rate.

$\begin{array}{c}\text{Predetermined overhead rate}=\frac{\text{Budgeted factory overhead}}{\text{Direct labor hour}}\\ =\frac{\$1,261,500}{\text{87,000}}\\ =\$14.50\text{ per direct labor hour}\end{array}$

Therefore, predetermined factory overhead rate is $13.60 per direct labor hour.

2.

To determine

Prepare journal entries.

Explanation of Solution

Prepare journal entries.

Date	Description	Post Ref	Debit ($)	Credit($)
a.	Direct material inventory		130,000
	Accounts payable (1)			130,000
	(To record purchase)
b.	Material inventory		1,025
	Accounts payable (2)			1,025
	(To record purchase of glue)
c.	Work-in-process inventory		91,000
	Factory overhead		1,116
	Material inventory (3)			91,000
	Material inventory (4)			1,116
	(To record requisitioned square feet)
d.	Work-in-process inventory (5)		141,900
	Factory overhead		46,000
	Cash			187,900
	(To record incurred and paid payroll costs)
e.	Factory overhead		15,230
	Cash			15,230
	(To record payment factory utility )
f.	Factory overhead		3,500
	Prepaid insurance			3,500
	(To record insurance cost for the manufacturing property and equipment)
g.	Factory overhead		8,500
	Accumulated depreciation			8,500
	(To record depreciation on manufacturing equipment)
h.	Selling & administrative expense		2,400
	Accumulated depreciation			2,400
	(To record depreciation on administrative asset)
i.	Advertising expense		5,500
	Cash			5,500
	(To record payment of advertising expenses in cash)
j.	Factory overhead		13,500
	Cash			13,500
	(To record incurred and paid other factory overhead costs)
k.	Selling & administrative expense		13,250
	Cash			13,250
	(To record miscellaneous selling & administrative expense )
l.	Work-in-process		93,525
	Factory overhead (6)			93,525
	(To record factory overhead)
m.	Finished goods inventory		93,525
	Work-in-process inventory			93,525
	(To record cost of finished goods)
n.	Accounts receivable		132,000
	Sales revenue			132,000
	(To record sales)
n.	Cost of goods sold		112,000
	Finished goods inventory			112,000
	(To record cost of goods sold)

Table (1)

Working Notes (1): Calculate the accounts payable.

$\begin{array}{c}\text{Accounts Payable}=\left(\begin{array}{l}\text{Indirect material cost}\\ \times \left(\begin{array}{l}\text{Purchase of square feet}\\ \text{of oak}\end{array}\right)\end{array}\right)\\ =\$26\times 5,000\\ =\$130,000\end{array}$

(2): Calculate the accounts payable.

$\begin{array}{c}\text{Accounts Payable}=\left(\begin{array}{l}\text{Indirect material cost}\\ \times \left(\begin{array}{l}\text{Purchase of glue}\\ \text{of oak}\end{array}\right)\end{array}\right)\\ =\$36\times 50\\ =\$1,800\end{array}$

(3): Calculate the material inventory.

$\begin{array}{c}\text{Material inventory}=\left(\begin{array}{l}\text{Cost of per square foot}\\ \times \text{Requisition square feet of oak}\end{array}\right)\\ =\left(26\times 3,500\right)\\ =\$91,000\end{array}$

(4): Calculate the material inventory.

$\begin{array}{c}\text{Material inventory}=\left(\begin{array}{l}\text{Cost of per square foot}\\ \times \text{Requisition square feet of oak}\end{array}\right)\\ =\left(36\times 31\right)\\ =\$1,116\end{array}$

(5) Calculate the work-in-process.

$\begin{array}{c}\left(\begin{array}{l}\text{Work-in-process }\\ \text{inventory}\end{array}\right)=\left(\begin{array}{l}\text{Incurred and payroll costs}\\ -\text{Indirect labor costs}\end{array}\right)\\ =\$187,900-\$46,000\\ =\$141,900\end{array}$

(6) Calculate the factory overhead.

$\begin{array}{c}\text{Factory overhead}=\left(\begin{array}{l}\text{Predetermined overhead rate}\\ \times \text{Direct labor hour}\end{array}\right)\\ =\$14.50\times 6,450\\ =\$93,525\end{array}$

3.

To determine

Compute the amount of overapplied or underapplied overhead.

Explanation of Solution

Calculate the actual overhead.

$\begin{array}{c}\text{Actual overhead}=\left(\begin{array}{l}\$1,116+\$46,000+\$15,230\\ \$3,500+\$8,500+\$13,500\end{array}\right)\\ =\$87,846\end{array}$

Calculate the overapplied overhead.

$\begin{array}{c}\text{Overapplied overhead}=\left(\begin{array}{l}\text{Applied overhead}\\ -\text{Actual overhead}\end{array}\right)\\ =\$93,525-\$87,846\\ =\$5,679\end{array}$

Therefore, the amount of overapplied or underapplied overhead is $5,679.

4.

To determine

Prepare a schedule of cost of goods sold cost of goods manufactured.

Explanation of Solution

Prepare a schedule of cost of goods manufactured.

M Company
Statement of Cost of Goods Manufactured
For the Month Ended August 31.
Particulars	Amount ($)	Amount ($)
Beginning materials inventory	0
Direct materials purchases	130,000
Total direct materials available	130,000
Ending direct materials inventory	39,000
Direct materials used		91,000
Direct labor		141,900
Factory overhead applied		93,525
Total current manufacturing costs		326,425
Add: Beginning work-in-process inventory		-
Total manufacturing cost to account for		326,425
Less: Ending work-in-process inventory		180,425
Cost of goods manufactured		146,000

Table (2)

Compute the actual overhead.

Particulars	Amount ($)
Indirect materials used	1,116
Factory utilities	15,230
Factory insurance	3,500
Depreciation expense-plant	8,500
Other factory overhead	13,500
Indirect labor	46,000
Total factory overhead	87,846
Total applied overhead	93,525
Overapplied overhead	5,679

Table (3)

Prepare the schedule of cost of goods sold.

M Company
Statement of Cost of Goods Sold
For the Month Ended August 31.
Particulars	Amount ($)
Finished goods beginning balance	0
Cost of goods manufactured	146,000
Total goods available for sale	146,000
Finished goods ending balance	34,000
Cost of goods sold	112,000
Overapplied overhead	5,679
Cost of goods sold	106,321

Table (4)

Therefore, the schedule of cost of goods sold is $106,321.

5.

To determine

Prepare income statement.

Explanation of Solution

Prepare income statement.

M Company
Income Statement
For the Month Ended August 31.
Particulars	Amount ($)	Amount ($)
Sales revenue		132,000
Cost of goods sold		106,321
Gross margin		25,679
Advertising expense	5,500
Selling and administrative	15,650
Total Selling and administrative		21,150
Operating income		4,529

Table (5)

Therefore, the operating income is $4,529.