E8.7 (LO 3), AP Da Mug, a coffee-mug producer, generally conducts over half of its business in the last month of the calendar year due to holiday sales. By the end of December, its fiscal year-end, Da Mug had accumulated Cost of Goods Sold in the amount of $245,000. Da Mug’s business model is to maintain minimal WIP Inventory and FG Inventory, so these two accounts had balances of just $10,000 and $15,000, respectively, on December 31. Da Mug does hold a fair amount of RM Inventory, however, so it will be able to quickly fulfill its orders. As a result, its December 31 RM Inventory (all direct materials) is $80,000. Da Mug utilizes a normal costing system, in its effort to have timely applied MOH information for each custom job, and its budgeted MOH rate is $2.25/direct labor hour. Budgeted MOH at the beginning of the year was $150,000; actual MOH costs incurred by the end of the year were $140,000. Actual direct labor hours used were 61,000. Required 1. Was Da Mug’s MOH cost for the year under- or overapplied? By how much? 2. Record the journal entry to close out that MOH difference by using the direct write-off method. 3. Record the journal entry to close out the MOH difference by prorating it to the appropriate inventory/cost accounts based on their ending balances (round proportions to four decimal places if needed). 4. Which of these closing entries is most appropriate for Da Mug this year? Explain.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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E8.7 (LO 3), AP Da Mug, a coffee-mug producer, generally conducts over half of its business in the last month of the calendar year due to holiday sales. By the end of December, its fiscal year-end, Da Mug had accumulated Cost of Goods Sold in the amount of $245,000. Da Mug’s business model is to maintain minimal WIP Inventory and FG Inventory, so these two accounts had balances of just $10,000 and $15,000, respectively, on December 31. Da Mug does hold a fair amount of RM Inventory, however, so it will be able to quickly fulfill its orders. As a result, its December 31 RM Inventory (all direct materials) is $80,000. Da Mug utilizes a normal costing system, in its effort to have timely applied MOH information for each custom job, and its budgeted MOH rate is $2.25/direct labor hour. Budgeted MOH at the beginning of the year was $150,000; actual MOH costs incurred by the end of the year were $140,000. Actual direct labor hours used were 61,000. Required 1. Was Da Mug’s MOH cost for the year under- or overapplied? By how much? 2. Record the journal entry to close out that MOH difference by using the direct write-off method. 3. Record the journal entry to close out the MOH difference by prorating it to the appropriate inventory/cost accounts based on their ending balances (round proportions to four decimal places if needed). 4. Which of these closing entries is most appropriate for Da Mug this year? Explain.

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