Chapter 2, Problem 1PSA

To determine

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.

1

To Compute: The Total of each production cost incurred in April.

Explanation of Solution

Computation of total each production cost in April.

Details	Job 306 ($)	Job 307 ($)	Job 308 ($)	Production cost in April ($)
Production Cost in March
Direct Materials	29,000	35,000
Direct Labor	20,000	18,000
Applied Overheads	10,000	9,000
Production Cost (A)	59,000	62,000		121,000
Production Cost in April
Direct materials	135,000	220,000	100,000	455,000
Direct Labor	85,000	150,000	105,000	340,000
Applied Overheads	42,500	75,000	52,500	170,000
Total cost of production in April (B)	262,500	445,000	257,500	965,000
Total Production Cost$\left(\text{A}+\text{B}\right)$	321,500	507,000	257,500	1,086,000

Table(1)

Hence, the total production cost in April is $1,086,000.

Working notes:

April

Given,
Applied overhead is 50% of the direct labor.

Computation of applied overheads for job 306,

$\begin{array}{c}\text{Applied}\text{overhead}=50\%\times \text{Direct}\text{labor}\text{of}\text{job}306\\ =50\%\times \$85,000\\ =\$42,500\end{array}$

Applied overhead for job 306 is $42,500.

Computation of applied overheads for job 307,

$\begin{array}{c}\text{Applied}\text{overhead}=50\%\times \text{Direct}\text{labor}\text{of}\text{job}307\\ =50\%\times \$150,000\\ =\$75,000\end{array}$

Applied overhead for job 307 is $75,000.

Computation of applied overheads for job 308,

$\begin{array}{c}\text{Applied}\text{overhead}=50\%\times \text{Direct}\text{labor}\text{of}\text{job}308\\ =50\%\times \$105,000\\ =\$52,500\end{array}$

Applied overhead for job 308 is $52,500.

Computation of total production cost in April,

$\begin{array}{c}\text{Total}\text{Production}\text{Cost}=\left(\begin{array}{l}\text{Production}\text{cost}\text{at}\text{the}\text{end}\text{of}\text{March}\\ +\text{Production}\text{cost}\text{in}\text{April}\end{array}\right)\\ =\$121,000+\$967,000\\ =\$1,088,000\end{array}$

The total production cost is $1,088,000.

2.

To determine

To prepare: Journal Entries.

Explanation of Solution

a.

To record material purchases on credit.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Purchase of raw materials		500,000
	Accounts payable			500,000
	(To record material purchases on credit

Table(2)

• 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.

b.

To record direct materials used in production.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Work in process inventory		455,000
	Raw materials inventory			455,000
	(To record. direct materials used in production.)

Table(3)

• Work in process inventory is an asset account. Work in process account increases as raw materials are in process to convert them into finished goods which will increase the assets and all the assets are debited as their value increases.
• Raw materials inventory is an asset account. Raw material decreases as they are used in production, hence asset decreases and all the assets are credited as their value decreases.

c.

To record the payment for direct labor.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Inventory Work in Progress		340,000
	Cash			340,000
	(To record the payment for direct labor)

Table(4)

• Inventory work in progress is an asset account. Inventory account increases as payment is made to the direct labor which increases the production of goods, hence asset increases and all the assets are debited as their values increase.
• Cash is an asset account. Cash account decreases as payment of direct labor is made in cash, hence asset decreases and all the assets are credited as their value decreases.

d.

To record the payment for indirect labor.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Factory Overhead Cost		23,000
	Cash			23,000
	(To record the payment for indirect labor)

Table(5)

• Factory overhead cost is an expense account. Factory overhead account increases as the expenses increases for the company for the payment of labor and all the expenses and losses are debited.
• Cash is an asset account. Cash account decreases as payment of direct labor is made in cash, hence asset decreases and all the assets are credited as their value decreases.

e.

To record overhead cost applied to work in process inventory.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Inventory Work in Progress		340,000
	Factory Overhead cost			340,000
	(To record the payment for direct labor)

Table(6)

• Inventory work in progress is an asset account. Inventory account increases as the overhead cost are applied to this account and will increase the value of asset and all assets are debited as their values increases.
• Factory overhead cost is a liability account. Factory overhead account increases as the liability for the company increases, hence it is credited.

f.

To record overhead cost incurred of indirect material costing $50,000.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Factory Overhead account		50,000
	Inventory-raw material			50,000
	(To record the overhead cost)

Table(7)

• Factory overhead is an expense account. Factory overhead increases as there is an indirect expense and all the expenses are debited.
• Inventory raw materials are an asset account. Inventory decreases as the expense is not directly related to the production and all the assets are credited as their value decreases.

To record the entry for payment of factory utilities for cash $19,000.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Factory Overhead account		19,000
	Cash			19,000
	(To record expenses paid)

Table(8)

• Factory overhead is an expense account. Since expense reduces equity and Expenses have been paid that is the reason it is debited.
• Cash is an asset account. Cash account decreases as the amount for expenses has been paid in cash, hence the asset decreases and all the assets are credited as their value decreases.

To record the depreciation indirect expense.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Factory Overhead account		51,000
	Accumulated depreciation			51,000
	(To record depreciation booked towards factory overheads)

Table(9)

• Factory overhead is an expense account. Factory overhead increases as the depreciation is charged towards overheads accounts and all expenses and losses are debited.
• Accumulated depreciation is a contra asset account and has a credit balance. Accumulated depreciation increases as the expense is transferred to this account.

To Record the payment of rent.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Factory Overhead account		32,000
	Cash			32,000
	(To record expenses paid)

Table(10)

• Factory overhead is an expense account. Since expense reduces equity and Expenses have been paid that is the reason it is debited.
• Cash is an asset account. Cash account decreases as the amount for expenses has been paid in cash, hence the asset decreases and all the assets are credited as their value decreases.

g.

To record the transfer of jobs 306 and 307 to finished goods inventory.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Inventory-finished goods		828,500
	Inventory-work in progress			828,500
	(To record completion of jobs)

Table(11)

• Inventory is an asset account. Inventory account increases as the work in process goods are now converted into finished goods, hence the balance will be transferred to finished goods, and hence the account increases and all assets are debited as their values increase.
• Inventory work in progress is an asset account. Inventory account decreases as the balance has been transferred to finished goods and balance of work in progress account reduces, hence it is credited.

Working notes:

Total production of job 306 as per the table is $321,500.
Total production of job 307 as per the table is $507,000.

Computation of total production transferred.

$\begin{array}{c}\text{Total}\text{production}\text{transferred}=\left(\begin{array}{l}\text{Total production of job }306\\ +\text{Total production of job }307\end{array}\right)\\ =\$321,500+\$507,000\\ =\$828,500\end{array}$

Total production transferred is $828,500.

h.

To record the cost of goods sold of job 6 cost $321,500.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Cost of goods sold		321,500
	Inventory-finished goods			321,500
	(To record the cost of sale)

Table(12)

• Cost of goods sold is an expense account. Cost of goods sold increases as the cost is ascertained for the product which is about to be sold and all expenses and losses are debited.
• Inventory (finished goods) is an asset account. Inventory account decreases as the asset is being sold, hence asset decreases and all the assets are credited as their value decreases.

i.

To record the entry for revenue from the sale of job 306.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Cash		635,000
	Sale of goods			635,000
	(To record cash sale)

Table(13)

• Cash account is an asset account. Cash account increases as the sale has been made and cash has come into the business, hence the asset increases and all assets are debited as their values increases.
• Sale of goods is a revenue account. Sale and revenue generated are always credited as all incomes and gains are credited.

j.

To record the entry for under applied overheads.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
	Cost of goods sold		5,000
	Factory over head cost			5,000
	(To record the cost of sale)

Table(14)

• Cost of goods sold is an expense account. Cogs increases as the under applied amount of goods s added to the cost of goods sold and it increases the balance of cogs and all expenses and losses are always debited.
• Factory over head cost is an expense account. The account decreases as it was wrongly debited earlier of under applied goods to reverse it, it is credited.

Working notes:

Given,
Over head on indirect materials is $50,000.
Over head on indirect man power is $23,000.
Factory rent is $32,000.
Factory utilities are $19,000.
Factory equipment depreciation is $51,000.

Computation of total overheads,

$\begin{array}{c}\text{Total}\text{overheads}=\left(\begin{array}{l}\text{Over head on indirect materials}\\ +\text{Over head on indirect man power}\\ +\text{Factory rent}+\text{Factory utilities}\\ +\text{Factory equipment depreciation}\end{array}\right)\\ =\$50,000+\$23,000+\$32,000+\$19,000+\$51,000\\ =\$175,000\end{array}$

The total overheads are $175,000.

Overhead applied is $170,000.

Computation of excess balance or under applied.

$\begin{array}{c}\text{Under}\text{applied}\text{overhead}=\text{Total}\text{overhead}-\text{Overhead}\text{applied}\\ =\$175,000-\$170,000\\ =\$5,000\end{array}$

Under applied overhead is $5,000.

3.

To determine

To prepare: The schedule of cost of goods manufactured.

Explanation of Solution

Computation of schedule of cost of goods manufactured.

M Company Schedule for cost of goods manufactured for the year ended on April 30
Particulars	Cost ($)
Direct Materials Cost	455,000
Direct Labor Cost	340,000
Factor Overheads	170,000
Total Cost	965,000
Work in progress for jobs 306 and 307	121,000
Total Cost	1,086,000
Less: Work in progress of job 308	257,500
Total goods manufactured	828,500

Table(15)

Hence, the total goods manufactured are $828,500.

4.

To determine

To compute: Gross profit for April and to present inventories.

Explanation of Solution

Explanation;

Given,
Sales are $635,000.
Cost of goods sold is $326,000.

Formula to calculate gross profit,

$\text{Gross}\text{Profit}=\text{Sales}-\text{Cost}\text{of}\text{goods}\text{sold}$

Substitute $635,000 for sales and $326,000 for cost of goods sold.

$\begin{array}{c}\text{Gross}\text{Profit}=\$635,000-\$326,000\\ =\$309,000\end{array}$

Hence the gross profit is $309,000.

Compute total inventories.

Given,
Raw materials are $80,000.

Formula to calculate the total inventories,

$\text{Total}\text{Inventories}=\left(\begin{array}{l}\text{Raw}\text{materials}+\text{Finished}\text{goods}\text{of}\text{job}\text{307}\\ +\text{Work}\text{in}\text{progress}\text{of}\text{the}\text{job}\text{308}\end{array}\right)$

Substitute $80,000 for raw materials, $257,000 for the finished goods of job 307 and $507,000 for work in progress of the job 308.

$\begin{array}{c}\text{Total}\text{Inventory}=\$80,000+\$257,000+\$507,000\\ =\$844,000\end{array}$

Hence, the total Inventory is $844,000.

5.

To determine

To identify: The impact of under applied goods to decision making.

Explanation of Solution

• Under applied overheads happens when actual overhead is greater than the applied overhead.
• Since, the batches of job or an individual job hold under the cost, therefore it is certain that the overheads are under applied by $5,000.

Hence, under applied overheads are those overheads that do not reach to the actual overheads.