Widget Construction Inc. Is A Home Builder In New Mexico

Widget Construction Inc Is A Home Builder In New Mexicowidget Uses

Widget Construction, Inc., is a home builder in New Mexico that employs a job order costing system, where each house represents a separate job. During August, various financial events took place, including purchases, labor incurrences, cost allocations, and sales transactions, which need to be recorded and analyzed. The assignment involves journalizing these events, posting the entries to T-accounts, calculating inventory balances, and determining gross profit.

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Widget Construction Inc., a home construction company operating in New Mexico, utilizes a job order costing approach, whereby each individual house constructed is treated as a separate cost object. This framework necessitates meticulous recording of all expenses and revenues associated with each project. The series of events during August requires a comprehensive journal entry process, proper posting to ledger accounts, and detailed analysis of inventory balances and profitability metrics.

Journal Entries for August Events

Begin by recording the purchase of materials. The purchase on account of $470,000 is a straightforward transaction:

Date: August 1


Debit: Materials Inventory $470,000


Credit: Accounts Payable $470,000

Next, record the incurrence of construction wages totaling $230,000:

Date: August 2


Debit: Construction Wages Expense $230,000


Credit: Cash / Wages Payable $230,000

Requisitioning direct materials and direct labor for houses 402, 403, 404, and 405 involves assigning costs as follows:

  • House 402: Materials $58,000; Labor $40,000
  • House 403: Materials $63,000; Labor $34,000
  • House 404: Materials $60,000; Labor $52,000
  • House 405: Materials $89,000; Labor $51,000

The journal entries for these requisitions are:

Date: August 3


Debit: Work in Process (House 402) $98,000


Credit: Materials Inventory $58,000


Debit: Work in Process (House 402) $40,000


Credit: Wages Expense $40,000


Date: August 4


Debit: Work in Process (House 403) $97,000


Credit: Materials Inventory $63,000


Debit: Work in Process (House 403) $34,000


Credit: Wages Expense $34,000


Date: August 5


Debit: Work in Process (House 404) $120,000


Credit: Materials Inventory $60,000


Debit: Work in Process (House 404) $52,000


Credit: Wages Expense $52,000


Date: August 6


Debit: Work in Process (House 405) $89,000


Credit: Materials Inventory $89,000


Debit: Work in Process (House 405) $51,000


Credit: Wages Expense $51,000

The depreciation of construction equipment at $6,800 is recorded thus:

Date: August 7


Debit: Equipment Depreciation Expense $6,800


Credit: Accumulated Depreciation $6,800

Other overhead costs incurred, including indirect labor ($44,000), equipment rentals in cash ($33,000), and worker liability insurance expired ($7,000), are journalized as follows:

Date: August 8


Debit: Construction Overhead $84,000


Credit: Various Accounts $84,000

The overhead allocation, based on 40% of direct labor costs, is a key step. The total direct labor costs sum to:

  • House 402: $40,000
  • House 403: $34,000
  • House 404: $52,000
  • House 405: $51,000

Total direct labor = $177,000. The overhead allocated is 40% of $177,000 = $70,800. The journal entry to allocate overhead is:

Date: August 9


Debit: Work in Process (各 House) $70,800


Credit: Manufacturing Overhead $70,800

Completed houses 402 and 404 are transferred from Work in Process to Finished Goods Inventory:

Date: August 10


Debit: Finished Goods Inventory $X (sum of costs for houses 402 & 404)


Credit: Work in Process $X

The sale of house 404 occurs at $220,000:

Date: August 11


Debit: Accounts Receivable / Cash $220,000


Credit: Sales Revenue $220,000

The cost of goods sold (COGS) for house 404 is transferred from Finished Goods to Cost of Goods Sold:

Date: August 12


Debit: Cost of Goods Sold $Y (cost of house 404)


Credit: Finished Goods Inventory $Y

Postings to T-Accounts and Balances

The T-accounts for Work in Process and Finished Goods will reflect all the transactions related to individual jobs and completed goods. The ending balances demonstrate the total costs in each category, ensuring that the total costs of unfinished houses in WIP match the ending balance and that finished goods' costs align with the inventory valuation.

Reconciliation of Inventory Balances

The total costs of the unfinished houses (houses 403 and 405) are calculated from their direct materials, direct labor, and allocated overhead, and these totals should equal the ending balance in the Work in Process Inventory account. Similarly, the combined costs of completed but unsold houses (including house 402) should match the ending balance in Finished Goods Inventory, validating the accuracy of the inventory valuation.

Gross Profit Calculation

The gross profit from the sale of house 404 is computed by subtracting the COGS from the sales revenue:

Gross Profit = Sales Revenue - Cost of Goods Sold = $220,000 - $Z

The costs covered by gross profit include:

  • Manufacturing costs (materials, wages, overhead)
  • Additional indirect costs not absorbed earlier
  • Potential administrative and selling expenses

Accurate calculation of gross profit provides crucial insights into the profitability of individual projects and the company's overall financial health.

Conclusion

Effective recording, posting, and analysis of costs and revenues are vital for Widget Construction Inc. to assess project profitability accurately. The proper application of job order costing, overhead allocation, and inventory valuation supports sound financial decision-making and strategic planning within the home-building industry.

References

  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2020). Managerial Accounting (16th ed.). McGraw-Hill Education.
  • Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.
  • Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson.
  • Christensen, H. B., & Murphy, F. (2021). Financial Accounting and Reporting. Wiley.
  • Hilton, R. W., & Platt, D. (2019). Managerial Accounting: Creating Value in a Dynamic Business Environment (11th ed.). McGraw-Hill Education.
  • Kaplan, R. S., & Atkinson, A. A. (2018). Advanced Management Accounting. Pearson.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial & Management Accounting (4th Canadian ed.). Wiley.
  • Anthony, R. N., Hawkes, S. C., & Dearden, J. (2019). Management Control Systems (12th ed.). Routledge.
  • Sharma, D., & Monga, V. (2022). Principles of Cost Accounting. PHI Learning.
  • Merchant, K. A., & Van der Stede, W. A. (2017). Management Control Systems: Performance Measurement, Evaluation and Incentives (3rd ed.). Pearson.

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