Question

Bunnell Corporation is a manufacturer that uses job-order costing. On January 1, the company’s inventory balances were as follows:

Raw materials $ 40,000

Work in process $ 18,000

Finished goods $ 35,000

The company applies overhead cost to jobs on the basis of direct labor-hours. For the current year, the company’s predetermined overhead rate of $16.25 per direct labor-hour was based on a cost formula that estimated $650,000 of total manufacturing overhead for an estimated activity level of 40,000 direct labor-hours. The following transactions were recorded for the year:

a. Raw materials were purchased on account, $510,000

b. Raw materials use in production, $480000. All of of the raw materials were used as direct materials.

c. The following costs were accrued for employee services: direct labor, $600,000; indirect labor, $150,000; selling and administrative salaries, $240,000.

d. Incurred various selling and administrative expenses (e.g., advertising, sales travel costs, and finished goods warehousing), $367,000

e. Incurred various manufacturing overhead costs (e.g., depreciation, insurance, and utilities), $500,000.

f. Manufacturing overhead cost was applied to production. The company actually worked 41,000 direct labor-hours on all jobs during the year.

g. Jobs costing $1,680,000 to manufacture according to their job cost sheets were completed during the year.

h. Jobs were sold on account to customers during the year for a total of $2,800,000. The jobs cost $1,690,000 to manufacture according to their job cost sheets.

Question:

3. What is the journal entry to record the labor costs incurred during the year?

4. What is the total amount of manufacturing overhead applied to production during the year?

5. What is the total manufacturing cost added to Work in Process during the year?

6. What is the journal entry to record the transfer of completed jobs that is referred to in item g above?

7. What is the ending balance in Work in Process?

9. Is manufacturing overhead underapplied or overapplied for the year? By how much?

12. What is the ending balance in Finished Goods?

13. Assuming that the company closes its underapplied or overapplied overhead to Cost of Goods Sold, what is the adjusted cost of goods sold for the year?

14. What is the gross margin for the year?

15. What is the net operating income for the year?

Answer 1

3.

DR Selling and Administrative Salaries $240,000

Manufacturing Overhead $150,000

Work in Process $600,000

CR Wages Payable $990,000

4.

Manufacturing Overhead Applied

= 41,000 hours * 16.25

= $666,250

5. Total Manufacturing cost to be added = Raw Materials + Direct Labor + Manufacturing Overhead

= 480,000 + 600,000 + 666,250

= $1,746,250

6.

DR Finished Goods $1,680,000

CR Work in Process $1,680,000

7.

Ending Balance = Beginning balance + Raw materials + Direct labor + Manufacturing Overhead - Cost transferred to Finished goods

= 18,000 + 480,000 + 666,250 + 84,250 - 1,680,000

= $84,250

9. Predetermined overhead cost - Actual cost = 666,250 - 650,000 = $16,250.

Overapplied as predetermined cost was more than Actual.

12. Finished goods = Beginning balance + Cost transferred from WIP - Cost of goods sold

= 35,000 + 1,680,000 - 1,690,000

= $25,000

13.

Adjusted Cost of Goods sold = Cost of goods sold - Overapplied

= 1,690,000 - 16,250

= $1,673,750

14. Gross Margin = Sales - Adjusted COGS

= 2,800,000 - 1,673,750

= $1,126,350

15. Net Operating Income

= Gross Margin - Selling and Administrative salaries - Selling and Administrative expenses

= 1,126,350 - 240,000 - 367,000

= $519,250