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.

Required:
1. What is the journal entry to record the labor costs incurred during the year?
2. What is the total amount of manufacturing overhead applied to production during the year?
3. What is the total manufacturing cost added to Work in Process during the year?
4. What is the journal entry to record the transfer of completed jobs that is referred to in item g above?
5. What is the ending balance in Work in Process?
6. Is manufacturing overhead underapplied or overapplied for the year? By how much?
7. What is the ending balance in Finished Goods?
8. 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?
9. What is the gross margin for the year?
10. What is the net operating income for the year?

Answer 1

Answer:

1. Dr Salaries and Administrative salaries 240,000

Dr Manufacturing Overhead 150,000

Dr Work in process 600,000

Cr Wages Payable 990,000

2. $666,250

3. $1,746,250

4. Dr Finished goods 1,680,000

Cr Work in Process 1,680,000

5. $84,250

6. $16,250

7. $25,000

8. $1,673,750

9. $1,126,250

10. $519,250

Explanation:

1. Preparation of the journal entry to record the labor costs incurred

Dr Salaries and Administrative salaries 240,000

Dr Manufacturing Overhead 150,000

Dr Work in process 600,000

Cr Wages Payable 990,000

(To record labor cost incurred)

2. Preparation of the total amount of manufacturing overhead applied to production

Manufacturing overhead applied= 41,000 hours * $16.25

Manufacturing overhead applied= $666,250

3. Preparation of the total manufacturing cost added to Work in Process

Raw Materials $480,000

Direct Labor 600,000

Manufacturing Overhead 666,250

Cost added to WIP $1,746,250

4. Preparation of the journal entry to record the transfer of completed jobs

Dr Finished goods 1,680,000

Cr Work in Process 1,680,000

(To record the transfer of completed jobs)

5. Calculation for the ending balance in Work in Process:

Ending balance in Work in Process

Beginning Balance $18,000

b $480,000

f $666,250

c $600,000 $1,680,000 g

Ending Balance $84,250

6. Calculation for Overapplied manufacturing overhead

Overapplied manufacturing overhead= ($666,250-$650,000)

Overapplied manufacturing overhead= $16,250

Based on the above calculation the manufacturing overhead is overapplied for the year By the amount of $16,250

7. Calculation for the ending balance in Finished Goods

Ending balance in Finished goods

Dr Beginning balance $35,000

Dr (g) 1,680,000

Cr $1,690,000 (h)

Dr Ending balance $25,000

8. Calculation for the adjusted cost of goods sold for the year

Cost of goods sold $1,690,000

Less:Manufacturing overhead $16,250

The cost of goods sold for the year $1,673,750

9. Calculation for the gross margin for the year

Sales $2,800,000

Less:Cost Of Goods Sold ($1,673,750)

Gross Profit $1,126,250

10. Calculation for the net operating income for the year

Gross Profit $1,126,250

Less:Selling and Administrative Salaries $240,000

Less: Selling and Administrative Expenses $367,000

Net Operating Income $519,250