Chapter 1, Problem 13P

Potomac Automotive Co. manufactures engines that are made only on customers’ orders and to their specifications. During January, the company worked on Jobs 007, 008, 009, and 010. The following figures summarize the cost records for the month:

Jobs 007 and 008 have been completed and delivered to the customer at a total selling price of $426,000, on account. Job 009 is finished but has not yet been delivered. Job 010 is still in process. There were no materials or work in process inventories at the beginning of the month. Material purchases were $115,000, and there were no indirect materials used during the month.

Required:

1. 1. Prepare a summary showing the total cost of each job completed during the month or in process at the end of the month.
2. 2. Prepare the summary journal entries for the month to record the distribution of materials, labor, and overhead costs.
3. 3. Determine the cost of the inventories of completed engines and engines in process at the end of the month.
4. 4. Prepare the journal entries to record the completion of the jobs and the sale of the jobs.
5. 5. Prepare a statement of cost of goods manufactured.

To determine

Determine the total production cost for each job.

Explanation of Solution

Production costs are those costs that are incurred for manufacturing a product or providing the service to the end user. The following are three basic elements of production costs.

Calculate the total production cost for each job.

(Figure 1)

Excel workings:

(Figure 2)

To determine

Prepare journal entry to record the distribution of materials, labor and overhead cost.

Explanation of Solution

Prepare journal entry to record the distribution of materials, labor and overhead cost.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Work in process inventory	98,500
	Material inventory		98,500
	(To record the issuance of materials to production)

(Table 1)

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Work in process inventory	155,000
	Payroll		155,000
	(To record the distribution of payroll)

(Table 2)

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Work in process inventory	120,000
	Factory overhead		120,000
	(To record the distribution of factory overhead)

(Table 3)

To determine

Identify the cost of the inventories for the engines completed and the engines that are in process during the end of the month.

Explanation of Solution

• Cost of the inventories for the completed and not yet delivered engines is $59,000 (Job 009).
• Cost of inventories that are in process during the end of the month is $30,500 (Job 010).

To determine

Prepare journal entry to record the given transactions.

Explanation of Solution

Prepare journal entry to record the completion of jobs.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Finished goods	343,000
	Work in process (1)		343,000
	(To record jobs that were completed)

(Table 4)

Prepare journal entry to record the sale of jobs.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Accounts receivable	426,000
	Sales		426,000
	(To record the sale on account during June)

(Table 5)

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Cost of goods sold (2)	284,000
	Finished goods inventory		284,000
	(To record cost of goods sold)

(Table 6)

Working note 1: Calculate the value of jobs completed.

$\begin{array}{c}\text{Jobs completed = }\left(\begin{array}{l}\text{Total production cost of Job 007+}\\ \text{Total production cost of Job 008+}\\ \text{Total production cost of Job 009}\end{array}\right)\\ \text{=\$190,000+\$94,000+\$59,000}\\ \text{=\$343,000}\end{array}$

Working note 2: Calculate the value of cost of goods sold.

$\begin{array}{c}\text{Cost of goods sold =}\left(\begin{array}{l}\text{ Total production cost of Job 007}\\ \text{+Total production cost of Job 008}\end{array}\right)\\ \text{=\$190,000+\$94,000}\\ \text{=\$284,000}\end{array}$

To determine

Compute the Company P’s statement of cost of goods manufactured for the month ended January 31.

Explanation of Solution

Compute the Company P’s statement of cost of goods manufactured for the month ended January 31.

Company P
Statement of cost of goods manufactured
For the month ended January 31
Particulars	Amount in $	Amount in $
Direct materials:
Inventory, January 1	0
Add: Purchase	115,000
Total cost of available materials	115,000
Less: Inventory, January 31 (3)	16,500
Cost of materials used		98,500
Less: Indirect materials used		0
Cost of direct materials used in production		98,500
Direct labor		155,000
Factory  Overhead		120,000
Total manufacturing cost		373,500
Add: work in process inventory, January 1		0
		373,500
Less: Work in  process inventory, January 31		30,500
Cost of goods sold manufactured		343,000

(Table 7)

Working note 3: Calculate the value of ending inventory.

$\begin{array}{c}\text{Ending Inventory=}\left(\begin{array}{l}\text{ Cost of available materials}-\\ \text{Cost of materials used }\end{array}\right)\\ \text{=\$115,000}-\text{\$98,500}\\ \text{=\$16,500}\end{array}$