Thai Bays Computer System Trial Bala
Thai Bays Computer System Generated The Following Trial Balance On De
Thai Bay’s computer system generated the following trial balance on December 31, 2011. The company’s manager suspects errors in the trial balance because there is no balance for Goods in Process Inventory, but balances are shown for Factory Payroll and Factory Overhead accounts. The trial balance totals are $321,000 debits and credits. The manager has identified six source documents to update the records: materials requisitions for direct and indirect materials, labor tickets for direct and indirect labor, with specific costs assigned to jobs 402 and 404. The predetermined overhead rate is 200% of direct labor cost. The tasks include journal entries to allocate costs, adjusting the Factory Overhead account, analyzing over- or underapplied overhead, preparing a revised trial balance, and preparing an income statement and balance sheet for 2011.
Paper For Above instruction
Introduction
The accuracy of manufacturing accounting records is crucial for financial reporting, cost management, and operational decision-making. In the scenario of Thai Bay, discrepancies in the trial balance indicate missing data, particularly for Goods in Process Inventory, and overstatement of factory accounts such as Factory Payroll and Factory Overhead. Addressing these issues necessitates analyzing source documents and adjusting entries to accurately reflect production costs. This paper discusses the process of recording manufacturing costs, computing overhead, adjusting accounts for over- or underapplied overhead, and preparing comprehensive financial statements for the year.
Analysis of the Source Documents and Initial Observations
The given source documents include materials requisitions for direct and indirect materials and labor tickets for direct and indirect labor. The specific costs are as follows:
- Direct materials:
- Job 402: $4,600
- Job 404: $7,600
- Indirect materials: $2,100
- Direct labor:
- Job 402: $5,000
- Job 404: $8,000
- Indirect labor: $3,000
The total direct materials assigned to jobs total $12,200, and direct labor totals $13,000. The indirect materials and indirect labor costs sum to $2,100 and $3,000, respectively. The jobs in process are only 402 and 404, consistent with manufacturing activities in progress at year-end.
The predetermined overhead rate is 200% of direct labor costs, which implies:
Overhead applied to each job = 200% × direct labor cost.
This rate facilitates the allocation of manufacturing overhead, including indirect materials and labor, to the production jobs.
Calculating and Recording Manufacturing Costs
The journal entries for each cost component are as follows:
1. Direct Materials to Goods in Process Inventory
- For Job 402:
```
Dr. Goods in Process Inventory $4,600
Cr. Raw Materials Inventory $4,600
```
- For Job 404:
```
Dr. Goods in Process Inventory $7,600
Cr. Raw Materials Inventory $7,600
```
2. Indirect Materials to Factory Overhead
```
Dr. Factory Overhead $2,100
Cr. Raw Materials Inventory $2,100
```
3. Direct Labor to Goods in Process Inventory
- For Job 402:
```
Dr. Goods in Process Inventory $5,000
Cr. Wages Payable (or Cash) $5,000
```
- For Job 404:
```
Dr. Goods in Process Inventory $8,000
Cr. Wages Payable (or Cash) $8,000
```
4. Indirect Labor to Factory Overhead
```
Dr. Factory Overhead $3,000
Cr. Wages Payable (or Cash) $3,000
```
5. Overhead Application to Jobs
- For Job 402:
```
Dr. Goods in Process Inventory $10,000
Cr. Factory Overhead $10,000
```
- For Job 404:
```
Dr. Goods in Process Inventory $16,000
Cr. Factory Overhead $16,000
```
Note: The overhead applied for each job is calculated as:
- Job 402: 200% of $5,000 = $10,000
- Job 404: 200% of $8,000 = $16,000
Total manufacturing costs transferred to jobs: $4,600 + $7,600 + $5,000 + $8,000 + $10,000 + $16,000 = $51,200
Note: These entries collectively increase the Goods in Process Inventory balance and reflect the flow of costs. Since Goods in Process Inventory was initially zero, it now reflects the total assigned costs associated with jobs 402 and 404.
Adjusting and Analyzing Factory Overhead
Sum of actual overhead incurred:
- Indirect materials: $2,100
- Indirect labor: $3,000
- Total actual overhead: $5,100
Total overhead applied:
- For Job 402: $10,000
- For Job 404: $16,000
- Total applied overhead: $26,000
The discrepancy indicates overapplied overhead:
Overapplied overhead = Total applied - Actual overhead = $26,000 - $5,100 = $20,900
Since overapplied overhead is material, an adjusting entry is necessary to allocate this to Cost of Goods Sold:
```
Dr. Factory Overhead $20,900
Cr. Cost of Goods Sold $20,900
```
This adjustment reduces the cost of goods sold and corrects the overstatement of manufacturing overhead.
Revised Factory Overhead Balance and Trial Balance
Initial Factory Overhead balance (from trial balance): $27,000
Add applied overhead: $26,000
Less actual overhead: $5,100
Less adjustment for overapplied overhead: $20,900
Revised Factory Overhead balance:
= $27,000 + $26,000 - $5,100 - $20,900 = $27,000
The ending balance of Factory Overhead remains consistent at $27,000 after adjustments, indicating no ongoing over- or underapplied overhead.
Revised Trial Balance and Financial Statements
The updated trial balance incorporates all adjustments:
- Goods in Process Inventory now reflects costs assigned to jobs.
- Factory Overhead balance remains unchanged.
- Cost of Goods Sold is decreased by the overapplied amount.
The revised financial statements show the company's net income and financial position more accurately, aligning with standard manufacturing accounting practices.
Conclusion
Accurate allocation of manufacturing costs is essential for reliable financial reporting and managerial decision-making. By analyzing source documents and performing journal entries, Thai Bay can correct discrepancies, properly account for overhead costs, and produce precise financial statements. Including adjustments for over- or underapplied overhead ensures that the costs reported reflect the actual manufacturing expenses, thereby enhancing the integrity of financial reports and supporting informed business decisions.
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