Job Order Costing: The Following Selected Account Balances A
Job Order Costingthe Following Selected Account Balances Are Taken
(Job-Order Costing) The following selected account balances are taken from the books of Future Company as of January 1 of the year 2011: Cash $12,000, Work in Process $40,000, Accounts Payable $75,000, Accounts Receivable $48,000, Finished Goods $100,000, Salaries and Wages Payable $12,000, Prepaid Insurance $8,000, Accumulated Depreciation $120,000, Raw Materials $30,000.
The following data relate to the activities of Future Company during the year:
- Raw materials purchased on account, $150,000.
- Raw materials issued to production, $145,000 (all direct materials).
- Advertising cost incurred for the year, $50,000 (credit accounts payable).
- Utilities cost incurred for the factory, $35,000 (credit accounts payable).
- Salaries and wages costs incurred: direct labor, $250,000; indirect labor, $75,000; selling and administrative, $140,000.
- Depreciation recorded for the year, $20,000, for which 75 percent related to the factory and 25 percent related to selling and administrative functions.
- Other factory overhead costs incurred for the year, $30,000 (credit accounts payable).
- Other selling and administrative expenses incurred for the year, $25,000 (credit accounts payable).
- Prepaid insurance relates to factory production. One-half of the $8,000 of prepaid insurance expired during the current year.
- The company applies overhead cost to production on a basis of direct labor hours, at $5.50 per hour.
- Goods completed (cost of goods manufactured) for the year totaled $550,000.
- Goods which had a cost of $540,000 according to the costing system were sold on account for $800,000.
- Collections on account from customers during the year totaled $790,000.
- Cash distributed during the year: on accounts payable, $300,000; for salaries and wages, $460,000.
Paper For Above instruction
In this comprehensive analysis, we will perform detailed journal entries, T-account postings, and calculations to elucidate the accounting procedures and financial outcomes of Future Company’s activities during the year 2011, based on the provided data. The process involves closing the accounts, assessing over- or under-applied overhead, and preparing the income statement.
Part A: Posting Entries to T-Accounts and Computing Balances
Initially, we create T-accounts for all account balances at January 1, 2011. The balances are recorded as either debits or credits, consistent with accounting principles. For each activity, corresponding journal entries are made, and their effects are posted to these accounts.
Initial Balances at January 1, 2011
- Cash: $12,000 (Debit)
- Work in Process (WIP): $40,000 (Debit)
- Accounts Payable: $75,000 (Credit)
- Accounts Receivable: $48,000 (Debit)
- Finished Goods: $100,000 (Debit)
- Salaries and Wages Payable: $12,000 (Credit)
- Prepaid Insurance: $8,000 (Debit)
- Accumulated Depreciation: $120,000 (Credit)
- Raw Materials: $30,000 (Debit)
Recording Purchases and Material Issuance
Purchase of raw materials (Entry 1):
Raw Materials 150,000
Accounts Payable 150,000
Issued raw materials to production (all direct materials) (Entry 2):
Work in Process 145,000
Raw Materials 145,000
Recording Factory and Selling & Administrative Expenses
Factory utilities (Entry 4):
Factory Overhead 35,000
Accounts Payable 35,000
Salaries and wages (Entry 5):
Work in Process 250,000
Factory Overhead 75,000
Selling & Administrative Expenses 140,000
Salaries & Wages Payable 465,000
Depreciation (Entry 6):
Factory Overhead 15,000 (75% of 20,000)
Selling & Administrative Expenses 5,000 (25% of 20,000)
Accumulated Depreciation 20,000
Other factory overhead costs (Entry 7):
Factory Overhead 30,000
Accounts Payable 30,000
Other selling and administrative expenses (Entry 8):
Selling & Administrative Expenses 25,000
Accounts Payable 25,000
Insurance expense (assuming the expired amount):
Factory Overhead 4,000
Prepaid Insurance 4,000
Applying Overhead and Recording Goods Completed
Overhead application based on direct labor hours (Entry 10) (For illustrative purposes, calculating direct labor hours):
Direct labor costs = $250,000; Overhead rate = $5.50 per hour; thus, direct labor hours = $250,000 / (average wage rate). Assuming an average wage rate of $20/hour (for simplicity), hours = 12,500 hours. Overhead applied = 12,500 hours × $5.50 = $68,750.
Applying overhead (Entry):
Work in Process 68,750
Factory Overhead 68,750
Goods manufactured (Entry 11): The total cost of goods manufactured (COGM) is $550,000, which includes direct materials, direct labor, and applied overhead.
Work in Process 550,000
Raw Materials Used 145,000
Direct Labor 250,000
Applied Overhead 68,750
Goods Sold and Closing Entries
Cost of Goods Sold (COGS): $540,000 (per data)
Revenue from sales: $800,000
Collection from customers: $790,000 (Entry)
Accounts Receivable 790,000
Cash 790,000
Cash 790,000
Accounts Receivable 790,000
Summary of End Balances
After posting all transactions, the balances in key T-accounts are calculated by summing debits and credits, considering the initial balances and entries made during the year. The ending balances in Work in Process, Raw Materials, Factory Overhead, Finished Goods, and other accounts reflect the operational activity of Future Company in 2011.
Part B: Overapplied or Underapplied Overhead and Closing to COGS
Total actual factory overhead incurred: $35,000 (utilities) + $30,000 (other) + $20,000 (depreciation) = $85,000.
Total applied overhead: $68,750 (from earlier calculation). Since applied overhead ($68,750) is less than actual overhead ($85,000), overhead is underapplied by $16,250.
Factory Overhead Underapplied = Actual Overhead - Applied Overhead = $85,000 - $68,750 = $16,250
To close underapplied overhead, the following journal entry is made:
Cost of Goods Sold 16,250
Factory Overhead 16,250
Part C: Income Statement for the Year Ended December 31, 2011
The income statement consolidates revenues and expenses, considering the cost of goods sold, operating expenses, and other costs.
Income Statement
| Revenues | Amount |
|---|---|
| Sales Revenue | $800,000 |
| Cost of Goods Sold | ($540,000 + $16,250) = $556,250 |
| Gross Profit | $243,750 |
| Operating Expenses |
|
| Salaries & wages (indirect): $75,000
Selling & Admin Expenses: $140,000 Factory Overhead: $30,000 Selling & Admin Expenses: $25,000 Depreciation (selling/admin): $5,000 |
Total Operating Expenses: $275,000 |
| Net Operating Loss | ($31,250) |
Therefore, Future Company’s net loss for 2011 is approximately $31,250, reflecting operational costs exceeding gross profit. This analysis underscores the importance of precise overhead application and cost control in manufacturing operations.
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