Chapter 15, Problem 5PSA

To determine

Overhead:

Overheads are the cost and the expenses a company incurs of the production of a particular goods or services which are not directly related to the production. It does not include labor and direct material.

Direct Material Cost:

Direct material cost is the cost that a company incurs while manufacturing a certain product or service. It includes all the cost and expenses that are directly associated with the production such as raw materials.

Direct Labor Cost:

Direct labor cost is the cost that a company incurs in giving wages to the people that are directly associated with the production work.

Journal Entries:

Journal entries are the entries that are made in the books of accounts to record every transaction that happens in the business in the chronological order.

Accounting rules for journal entries:

• To Increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.

• To Decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.

To prepare: Job cost sheet and journal entries.

Explanation of Solution

Solution:

a.

To record material purchases on credit.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Purchase of raw materials		78,700
	Accounts payable			78,700
	(To record material purchases on credit)
Table (1)

• Purchase of raw materials is an asset account. Raw material increases as the new raw materials has been brought to the business that increases the assets and all the assets are debited as their values increases.
• Account payable is a liability account. Account payable increases as the raw materials are purchased on credit, hence the liability increases and all the liabilities are credited as their values decreases.

Working notes:

Receiving report #426
Given,
Units are 250.
Unit price is $250.

Computation of total price,

$\begin{array}{c}\text{Total}\text{price}=\text{Units}\times \text{Unit}\text{price}\\ =250\times \$250\\ =\$62,500\end{array}$

Total price of receiving report #426 is $62,500.

Receiving report #427
Given,
Units are 90.
Unit price is $180.

Computation of total price,

$\begin{array}{c}\text{Total}\text{price}=\text{Units}\times \text{Unit}\text{price}\\ =90\times \$180\\ =\$16,200\end{array}$

Total price of receiving report #427 is $16,200.

Computation of total price of both the jobs,

$\begin{array}{c}\text{Total}\text{price}=\text{Total}\text{receiving report }\#426+\text{Total}\text{receiving report }\#427\\ =\$62,500+\$16,200\\ =\$78,700\end{array}$

b.

Computation of job cost sheet of W company,

Job cost sheet
Customers name	W Company		Job number	102
	Direct materials	Direct labor	Overhead cost applied
Date	Requisition number	Amount ($)	Time ticket number	Amount ($)	Date	Rate	Amount ($)
	#35	33,750	#1-10	90,000		80%	72,000
	#36	12,960
	Total	46,710	Total	90,000		Total	72,000
Table (2)

Working notes:

Direct labor is $90,000.
Overhead rate is 80%.

Computation of applied overhead,

$\begin{array}{c}\text{Applied}\text{overhead}=\text{Direct}\text{}\text{labor}\times \text{Overhead}\text{rate}\\ =\$90,000\times 80\%\\ =\$72,000\end{array}$

Hence, the applied overhead is $72,000.

Computation of job cost sheet of R Company,

Job cost sheet
Customers name	W Company		Job number	103
	Direct materials	Direct labor	Overhead cost applied
Date	Requisition number	Amount	Time ticket number	Amount ($)	Date	Rate	Amount ($)
	#37	17,500	#11-30	65,000		80%	52,000
	#38	6,840
	Total	24,340	Total	65,000		Total	52,000
Table (3)

Working notes:
Direct labor is $65,000.
Overhead rate is 80%.

Computation of applied overhead,

$\begin{array}{c}\text{Applied}\text{overhead}=\text{Direct}\text{}\text{labor}\times \text{Overhead}\text{rate}\\ =\$65,000\times 80\%\\ =\$52,000\end{array}$

Hence, the applied overhead is $52,000.

c.

Computation of material ledger card of M material,

              Table (4)

Computation of material ledger card of R,

              Table (5)

Computation of material ledger card of paint,

              Table (6)

d.

To record factory payroll paid in cash.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Factory payroll		174,250
	Cash			174,250
	(To record factory payroll paid)
Table (7)

• Factory payroll is an expense account. The account is debited as all the expenses and losses are debited according to the rules.
• Cash is an asset account. The account decreases as the amount paid for factory payroll is paid in cash, hence the asset decreases and it is credited.

To record the expense for overhead for cash

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Factory Overhead account		102,000
	Cash			102,000
	(To record the overhead cost)
Table (8)

• Factory overhead is an expense account. The account increases as the expense is paid and all the expenses and losses are debited.
• Cash is an asset account. Cash account decreases as the amount paid for the expense is paid in cash, hence asset decreases and it is credited.

e.

To record completion of jobs.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Finished goods inventory		208,710
	Work in process			208,710
	(To record completion of jobs)
Table (9)

• Finished goods inventory is an asset account. The account increases as the balance of work in process has been transferred to the finished goods account, hence the balance increases and it is debited.
• Work in process is an asset account. The account decreases as the balance of the account has been transferred to the finished goods account, hence the asset decreases and the account is credited.

Working note:

Given,
Direct materials are $46,710.
Direct labor is 90,000.
Over head is $72,000.

Computation of the total cost transferred,

$\begin{array}{c}\text{Total}\text{cost}\text{transferred}=\text{Direct}\text{materials}+\text{Direct}\text{labor}+\text{Overhead}\\ =\$46,710+\$90,000+\$72,000\\ =\$208,710\end{array}$

Total cost transferred to finished goods is $208,710.

f.

To record sales on discount.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Accounts receivable		400,000
	Sales			400,000
	(To record sales)
Table (10)

• Accounts receivable is an asset account. The account increases as the sale has been made and the debtors increase, hence it is debited.
• Sales are a revenue account. The account generates income and all the incomes and gains are credited as per the rules.

g.

To record cost of sales.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Cost of goods sold		208,710
	Finished goods inventory			2088,710
	(To record cost of sales)
Table (11)

• Cost of goods sold is an expense account. The account increases as the cost of sales has been ascertained and all expenses are debited.
• Finished goods inventory is an asset account. The account decreases as the balance has been transferred to cost of goods sold account and hence it is credited.

h.

To record direct and indirect materials.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Goods in process		71,050
	Factory overhead		1,125
	Raw materials inventory			72,175
	(To record direct and indirect materials)
Table (12)

• Goods in process are an asset account. The account increases as the direct labor is directly associated with the goods, hence the asset increases and it is debited.
• Factory overhead is an expense account. The account increases as the indirect labor is treated as an expense and all the expenses are debited.
• Raw materials inventory is an asset account. The account decreases as the amount has been transferred to the goods in process and factory overhead account.

i.

To record the direct and indirect labor.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Goods in process		155,000
	Factory overhead		19,250
	Factory payroll			174,250
	(To record direct and indirect labor)
Table (13)

• Goods in process are an asset account. The account increases as the direct labor is directly associated with the goods, hence the asset increases and it is debited.
• Factory overhead is an expense account. The account increases as the indirect labor is treated as an expense and all the expenses are debited.
• Factory payroll is a liability account. The account increases as amount is to be paid to the labors, hence the liability increases and hence it is credited.

Working note:

Direct labor of job 102 is $90,000.
Direct labor of job 103 is $65,000.

Computation of work in process,

$\begin{array}{c}\text{Work}\text{in}\text{process}=\text{Direct labor of job }102+\text{Direct labor of job }103\\ =\$90,000+\$65,000\\ =\$155,000\end{array}$

Hence, the work in process is $155,000.

j.

To record the entry to apply overhead.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Goods in process		124,000
	Factory overhead			124,000
	(To record apply overhead)
Table (14)

• Goods in process account are an asset account. The account increases as the overhead is directly related to production, hence the asset increases and it is debited.
• Factory overhead is an expense account. The account decreases as the expenses decreases and hence it is credited.

Working note:

Overhead applied in job 102 is $72,000.
Overhead applied in job 103 is $52,000.

Computation of total overhead applied,

$\begin{array}{c}\text{Total}\text{}\text{overhead}=\text{Overhead applied in job }102+\text{Overhead applied in job }103\\ =\$72,000+\$52,000\\ =\$124,000\end{array}$

Computation of balance in the factory overhead account,

Factory overhead
Date	Particular	Debit ($)	Date	Particular	Credit ($)
	Miscellaneous overhead	102,000		Goods in process	124,000
	Indirect materials	1,125
	Indirect labor	19,250
	Balance c/f	1,625
		124,000			124,000
Table (15)

Hence, the over applied overhead is $1,625.