PA2-5 Recording Manufacturing Costs and Analyzing Manufacturing Overhead | Complete Solution

PA2-5 Recording Manufacturing Costs and Analyzing Manufacturing Overhead [LO 2-3, 2-4, 2-5]


Christopher’s Custom Cabinet Company uses a job order cost system with overhead applied as a percentage of direct labor costs. Inventory balances at the beginning of 2013 follow:


Raw materials inventory $ 20,000
Work in process inventory 15,000
Finished goods inventory 32,000

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The following transactions occurred during January:

(a) Purchased materials on account for $26,000.
(b) Issued materials to production totaling $40,000, 80 percent of which was traced to specific jobs and the remainder of which was treated as indirect materials.

(c) Payroll costs totaling $69,700 were recorded as follows:
$18,000 for assembly workers
5,200 for factory supervision
31,000 for administrative personnel
15,500 for sales commissions
(d) Recorded depreciation: $8,500 for machines, $2,400 for the copier used in the administrative office.
(e) Recorded $4,000 of expired insurance. Forty percent was insurance on the manufacturing facility, with the remainder classified as an administrative expense.

(f) Paid $7,800 in other factory costs in cash.
(g) Applied manufacturing overhead at a rate of 300 percent of direct labor cost.
(h) Completed all jobs but one; the job cost sheet for this job shows $10,000 for direct materials, $3,000 for direct labor, and $9,000 for applied overhead.

(i) Sold jobs costing $70,000. The revenue earned on these jobs was $91,000.



Required:
1. Set up T-accounts, record the beginning balances, post the January transactions, and compute the final balance for the following accounts:

a. Raw Materials Inventory.
b. Work in Process Inventory.
c. Finished Goods Inventory.
d. Cost of Goods Sold.
e. Manufacturing Overhead.
f. Selling, General, and Administrative Expenses.
g. Sales Revenue.
h. Other accounts (Cash, Payables, etc.).

2. Determine how much gross profit the company would report during the month of January before any adjustment is made for the overhead balance.

3. Determine the amount of over- or underapplied overhead.

4. Compute adjusted gross profit assuming that any over- or underapplied overhead balance is adjusted directly to Cost of Goods Sold.