Question

Olson Corp. constructs new homes and uses a job-order costing system. During May, the following transactions occurred:

Olson purchased $4,500 of lumber on account.
Olson used $3,750 of lumber in production and incurred 50 hours of direct labor at $15 per hour.
Depreciation of $1,500 on equipment used to build new houses was recorded.
A house that was completed in April at a cost of $150,000 was sold for $180,000 cash.
The journal entry to record labor for Olson would include a
debit to Finished Goods of $750.
debit to Wages Payable of $750.
credit to Finished Goods of $750.
debit to WIP of $750.

Answer 1

The correct journal entry for the labor costs incurred by Olson Corp. would be a debit to WIP of $750. For the self-check question, the firm's accounting profit was $50,000 after subtracting expenses for labor, capital, and materials from the sales revenue of $1 million.

Step-by-step explanation:

The journal entry to record labor for Olson Corp. would include a debit to Work in Process (WIP) of $750, not a debit to Finished Goods or Wages Payable. This entry reflects the direct labor costs incurred for the work done on homes that are still in the production process. Olson used $3,750 worth of lumber and incurred 50 hours of direct labor at $15 per hour. The 50 hours of direct labor amounts to $750 (50 hours x $15 per hour).

To answer the self-check questions, the accounting profit is calculated by subtracting the total expenses from the sales revenue. This means, with a sales revenue of $1 million and expenses for labor ($600,000), capital ($150,000), and materials ($200,000), the accounting profit would be:

Accounting Profit = Sales Revenue - Labor Costs - Capital Costs - Material Costs

Accounting Profit = $1,000,000 - $600,000 - $150,000 - $200,000 = $50,000.