Q1. Production Company produces gadgets for the coveted small appliance market. The
following data reflect activity for the year 2011:
Costs incurred:
Purchases of direct materials (net) on credit $124,000
Direct manufacturing labor cost 80,000
Indirect labor 54,500
Depreciation, factory equipment 30,000
Depreciation, office equipment 7,000
Maintenance, factory equipment 20,000
Miscellaneous factory overhead 9,500
Rent, factory building 70,000
Advertising expense 90,000
Sales commissions 30,000
INVENTORIES jan 1, 2011 dec 31, 2011
Direct material........ 9000...........11000
Work in process....... 6000..........21000
Finished goods........ 69000.........24000
Production Co. uses a normal costing system and allocates overhead to work in process at
a rate of $2.50 per direct manufacturing labor dollar. Indirect materials are insignificant
so there is no inventory account for indirect materials.
Required:
1. Prepare journal entries to record the transactions for 2011 including an entry to close
out over- or under-allocated overhead to cost of goods sold. For each journal entry
indicate the source document that would be used to authorize each entry. Also note which
subsidiary ledger, if any, should be referenced as backup for the entry.
2. Post the journal entries to T-accounts for all of the inventories, Cost of Goods Sold, the
Manufacturing Overhead Control Account, and the Manufacturing Overhead Allocated
Account
1. Journal Entries:
a. Purchases of direct materials (net) on credit:
Debit Raw Materials Inventory $124,000
Credit Accounts Payable $124,000
Source Document: Purchase Order
Subsidiary Ledger: Raw Materials Inventory
b. Direct manufacturing labor cost:
Debit Work in Process Inventory $80,000
Credit Wages Payable $80,000
Source Document: Time Cards
Subsidiary Ledger: Work in Process Inventory
c. Indirect labor:
Debit Manufacturing Overhead Allocated $54,500
Credit Wages Payable $54,500
Source Document: Payroll Register
Subsidiary Ledger: Manufacturing Overhead Allocated
d. Depreciation, factory equipment:
Debit Manufacturing Overhead Allocated $30,000
Credit Accumulated Depreciation $30,000
Source Document: Depreciation Schedule
Subsidiary Ledger: Manufacturing Overhead Allocated
e. Depreciation, office equipment:
Debit Selling and Administrative Expenses $7,000
Credit Accumulated Depreciation $7,000
Source Document: Depreciation Schedule
f. Maintenance, factory equipment:
Debit Manufacturing Overhead Allocated $20,000
Credit Accounts Payable $20,000
Source Document: Maintenance Invoice
Subsidiary Ledger: Manufacturing Overhead Allocated
g. Miscellaneous factory overhead:
Debit Manufacturing Overhead Allocated $9,500
Credit Accounts Payable $9,500
Source Document: Miscellaneous Expense Receipt
Subsidiary Ledger: Manufacturing Overhead Allocated
h. Rent, factory building:
Debit Manufacturing Overhead Allocated $70,000
Credit Accounts Payable $70,000
Source Document: Rent Invoice
Subsidiary Ledger: Manufacturing Overhead Allocated
i. Advertising expense:
Debit Selling and Administrative Expenses $90,000
Credit Accounts Payable $90,000
Source Document: Advertising Invoice
j. Sales commissions:
Debit Selling and Administrative Expenses $30,000
Credit Commissions Payable $30,000
Source Document: Sales Commission Agreement
k. Close out over- or under-allocated overhead to cost of goods sold:
Debit Cost of Goods Sold (if under-allocated)
Credit Manufacturing Overhead Allocated
Debit Manufacturing Overhead Allocated (if over-allocated)
Credit Cost of Goods Sold
2. T-Accounts:
Raw Materials Inventory:
Jan 1, 2011 - $9,000 (beginning balance)
Dec 31, 2011 - $11,000 (ending balance)
Purchases - $124,000
Total = $135,000
Work in Process Inventory:
Jan 1, 2011 - $6,000 (beginning balance)
Dec 31, 2011 - $21,000 (ending balance)
Direct labor - $80,000
Total = $107,000
Finished Goods Inventory:
Jan 1, 2011 - $69,000 (beginning balance)
Dec 31, 2011 - $24,000 (ending balance)
Total = $93,000
Cost of Goods Sold:
Total = ? (calculated after closing out over- or under-allocated overhead)
Manufacturing Overhead Control Account:
Total = ? (calculated after allocating overhead)
Manufacturing Overhead Allocated Account:
Total = ? (calculated after allocating overhead)