Chapter 2, Problem 5.1GBP

Recording Manufacturing Costs and Analyzing Manufacturing Overhead
Hamilton Custom Cabinet Company uses a job order cost system with overhead applied as a percentage of direct labor costs. Inventory balance at the beginning of 2016 follow:

The following transactions occurred during January:
a. Purchased materials on account for $42,000.
b. Issued materials to production totaling $45,000, 85 percent of which was traced to specific jobs and the remainder of which was treated as indirect materials.
c. Payroll costs totaling $30,000 were recorded as follows:
$17,300 for assembly workers
8,400 for factory supervision
2,500 for administrative personnel
1,800 for sales commissions
d. Recorded depreciation: $9,000 for machines and $25,000 for the copier used in the administrative Office.
e. Recorded $9,000 of expired insurance. Sixty percent was insurance on the manufacturing facility, with the remainder classified as an administrative expense.
f. Paid $7,900 in other factory costs in cash.
g. Applied manufacturing overhead at a rate of 200 percent of direct labor cost.
h. Completed all jobs but one; the job cost sheet for this job shows $18,000 for direct materials.
$7,000 for direct labor, and $14,000 for applied overhead.
i. Solid jobs costing $40,000 during the period; the company adds a 25 percent markup on cost to determine the sales price.
Set up T-accounts, record the beginning balances, post the January transactions, and compute the final balance for the following accounts:
a. Raw Materials Inventory.
b. Work in process Inventory.
c. Finished Goods Inventory.
d. Cost of Goods Sold.
e. Manufacturing Overhead.
f. Selling, General, and Administrative Expenses.
g. Sales Revenue.
h. Other accounts (Cash, Payables, etc.).

To determine

(a)

Recording Manufacturing Costs:

In cost accounting, various production stages of manufacturing a product are identified. Thus, manufacturing costs are recorded at such production processes to reflect appropriate apportionment of costs.

Analyzing Manufacturing Overhead:

The manufacturing overhead costs are incurred in a factory and it is related to the production process. It is attributed to the goods produced at such predetermined rate which is budgeted at the beginning of the period. Therefore, we can analyze such predetermined budgets and actual level of activity to calculate under, over or optimum utilization of the resources

To record:

The transactions in relation to Raw Materials Inventory for the month of January 2016.

Explanation of Solution

The transactions recorded in T-account of Raw Materials Inventory for the month of January 2016 of H.C.C. Co. are as follows-

Dr	Raw Materials Inventory		Cr
Particulars	Amount ($)	Particulars	Amount ($)
To Opening Balance	15,600	By Work in Process Inventory (Direct Materials Issued)	38,250
To Purchase Payables	42,000	By Manufacturing Overhead (Indirect Materials Issued)	6,750
		By Closing Balance	12,600
Total	57,600	Total	57,600

The direct materials issued will be transferred to work in process inventory while indirect materials consumed will be considered as a manufacturing overhead respectively.

To determine

(b)

Recording Manufacturing Costs:

In cost accounting, various production stages of manufacturing a product are identified. Thus, manufacturing costs are recorded at such production processes to reflect appropriate apportionment of costs.

Analyzing Manufacturing Overhead:

The manufacturing overhead costs are incurred in a factory and it is related to the production process. It is attributed to the goods produced at such predetermined rate which is budgeted at the beginning of the period. Therefore, we can analyze such predetermined budgets and actual level of activity to calculate under, over or optimum utilization of the resources

To record:

The transactions in relation to Work in Process Inventory for the month of January 2016.

Explanation of Solution

The transactions recorded in T-account of Work in Process Inventory for the month of January 2016 of H.C.C. Co. are as follows-

Dr	Work in Process Inventory		Cr
Particulars	Amount ($)	Particulars	Amount ($)
To Opening Balance	33,500
To Raw Materials Inventory	38,250
To Wages Payables (Direct Labor)	17,300
To Manufacturing Overhead	34,600
		By Finished Goods	84,650
		By Closing Balance	39,000
Total	123,650	Total	123,650

All such direct costs and applied manufacturing overhead involved in the processing of materials are considered under work in process inventory. As all the jobs are not completed, the total of direct materials, direct labor and applied overhead pertaining to work in process amounts to $39,000 is considered as closing balance for such period.

To determine

(c)

Recording Manufacturing Costs:

In cost accounting, various production stages of manufacturing a product are identified. Thus, manufacturing costs are recorded at such production processes to reflect appropriate apportionment of costs.

Analyzing Manufacturing Overhead:

The manufacturing overhead costs are incurred in a factory and it is related to the production process. It is attributed to the goods produced at such predetermined rate which is budgeted at the beginning of the period. Therefore, we can analyze such predetermined budgets and actual level of activity to calculate under, over or optimum utilization of the resources

To record:

The transactions in relation to Finished Goods Inventory for the month of January 2016.

Answer to Problem 5.1GBP

The transactions recorded in T-account of Finished Goods Inventory for the month of January 2016 of H.C.C. Co. are as follows-

Dr	Finished Goods Inventory		Cr
Particulars	Amount ($)	Particulars	Amount ($)
To Opening Balance	42,300
To Work in Process Inventory	84,650
		By Cost of Goods Sold	40,000
		By Closing Balance	86,950
Total	126,950	Total	126,950

Explanation of Solution

The goods which are completed would be transferred to finished goods inventory. However, the total costs of such jobs which are sold during such period would be transferred as cost of such goods sold respectively.

To determine

(d)

Recording Manufacturing Costs:

In cost accounting, various production stages of manufacturing a product are identified. Thus, manufacturing costs are recorded at such production processes to reflect appropriate apportionment of costs.

Analyzing Manufacturing Overhead:

The manufacturing overhead costs are incurred in a factory and it is related to the production process. It is attributed to the goods produced at such predetermined rate which is budgeted at the beginning of the period. Therefore, we can analyze such predetermined budgets and actual level of activity to calculate under, over or optimum utilization of the resources

To record:

The transactions in relation to Cost of Goods Sold for the month of January 2016.

Explanation of Solution

The transactions recorded in T-account of Cost of Goods Sold for the month of January 2016 of H.C.C. Co. are as follows-

Dr	Cost of Goods Sold		Cr
Particulars	Amount ($)	Particulars	Amount ($)
		By Sales Revenue	40,000
To Finished Goods	40,000
Total	40,000	Total	40,000

It represents the total cost of such goods sold during the period.

To determine

(e)

Recording Manufacturing Costs:

In cost accounting, various production stages of manufacturing a product are identified. Thus, manufacturing costs are recorded at such production processes to reflect appropriate apportionment of costs.

Analyzing Manufacturing Overhead:

The manufacturing overhead costs are incurred in a factory and it is related to the production process. It is attributed to the goods produced at such predetermined rate which is budgeted at the beginning of the period. Therefore, we can analyze such predetermined budgets and actual level of activity to calculate under, over or optimum utilization of the resources

To record:

The transactions in relation to Manufacturing Overhead for the month of January 2016.

Answer to Problem 5.1GBP

The transactions recorded in T-account of Manufacturing Overhead for the month of January 2016 of H.C.C. Co. are as follows-

Dr	Manufacturing Overhead		Cr
Particulars	Amount ($)	Particulars	Amount ($)
To Raw Materials Inventory	6,750	By Work in Process Inventory (Applied Manufacturing Overhead)	34,600
To Wages Payables (Indirect Labor)	8,400	By Under-Applied Overhead c/f	2,850
To Accumulated Depreciation	9,000
To Prepaid Insurance	5,400
To Cash (Other Factory Costs)	7,900
Total	37,450	Total	37,450

Explanation of Solution

The manufacturing overhead is the factory cost component in such production process. They are applied to work in process inventory as a result of predetermined overhead rate.The assembly workers payroll costs considered as direct labor cost. It is incurred in the manufacturing unit and directly related to such production process respectively. Thus, applied manufacturing overheads are charged at 200% of direct labor costs which is $34,600 ($17,300 * 200%).

To determine

(f)

Recording Manufacturing Costs:

In cost accounting, various production stages of manufacturing a product are identified. Thus, manufacturing costs are recorded at such production processes to reflect appropriate apportionment of costs.

Analyzing Manufacturing Overhead:

The manufacturing overhead costs are incurred in a factory and it is related to the production process. It is attributed to the goods produced at such predetermined rate which is budgeted at the beginning of the period. Therefore, we can analyze such predetermined budgets and actual level of activity to calculate under, over or optimum utilization of the resources

To record:

The transactions in relation to Selling, General and Administrative Expenses for the month of January 2016.

Explanation of Solution

The transactions recorded in T-account of Selling, General and Administrative Expenses for the month of January 2016 of H.C.C. Co. are as follows-

Dr.	Selling, General and Administrative Expenses		Cr
Particulars	Amount ($)	Particulars	Amount ($)
To Salary Payable for Administrative Personnel	2,500
To Sales Commissions Payable	1,800
To Accumulated Depreciation	25,000
To Prepaid Insurance	3,600
		By Closing Balance	32,900
Total	32,900	Total	32,900

All such costs in relation to administration, selling and distribution of goods during the period are recorded under Selling, General and Administrative Expenses.

To determine

(g)

Recording Manufacturing Costs:

In cost accounting, various production stages of manufacturing a product are identified. Thus, manufacturing costs are recorded at such production processes to reflect appropriate apportionment of costs.

Analyzing Manufacturing Overhead:

The manufacturing overhead costs are incurred in a factory and it is related to the production process. It is attributed to the goods produced at such predetermined rate which is budgeted at the beginning of the period. Therefore, we can analyze such predetermined budgets and actual level of activity to calculate under, over or optimum utilization of the resources

To record:

The transactions in relation to Sales Revenue for the month of January 2016.

Explanation of Solution

The transactions recorded in T-account of Sales Revenue for the month of January 2016 of H.C.C. Co. are as follows-

Dr	Sales Revenue		Cr
Particulars	Amount ($)	Particulars	Amount ($)
To Cost of Goods Sold	40,000	By Cash	50,000
To Gross Profit	10,000
Total	50,000	Total	50,000

The company determines its sales price by adding 25% markup on cost of such job. The jobs costing $40,000 has been sold during such period. Thus, the sales value is $50,000 ($40,000 * 125%) for the period.The excess of sales value over the cost of such goods sold represent the gross profit for the period.

To determine

(h)

Recording Manufacturing Costs:

In cost accounting, various production stages of manufacturing a product are identified. Thus, manufacturing costs are recorded at such production processes to reflect appropriate apportionment of costs.

Analyzing Manufacturing Overhead:

The manufacturing overhead costs are incurred in a factory and it is related to the production process. It is attributed to the goods produced at such predetermined rate which is budgeted at the beginning of the period. Therefore, we can analyze such predetermined budgets and actual level of activity to calculate under, over or optimum utilization of the resources

To record:

The transactions related to other accounts for the month of January 2016.

Explanation of Solution

The transactions recorded in T-account of Cash for the month of January 2016 of H.C.C. Co. are as follows-

Dr	Cash		Cr
Particulars	Amount ($)	Particulars	Amount ($)
To Sales Revenue	50,000	By Manufacturing Overhead	7,900
		By Closing Balance	42,100
Total	50,000	Total	50,000

The cash transactions during the period have been recorded to determine the cash balance.

The transactions recorded in T-account of Purchase Payables for the month of January 2016 of H.C.C. Co. are as follows-

Dr	Purchase Payables		Cr
Particulars	Amount ($)	Particulars	Amount ($)
		By Raw Materials Inventory	42,000
To Closing Balance	42,000
Total	42,000	Total	42,000

It is a payables account for raw materials acquired on credit terms.

The transactions recorded in T-account of Wages Payables for the month of January 2016 of H.C.C. Co. are as follows-

Dr	Wages Payables		Cr
Particulars	Amount ($)	Particulars	Amount ($)
		By Work in Process Inventory (Direct Labor)	17,300
		By Manufacturing Overhead (Indirect Labor)	8,400
To Closing Balance	25,700
Total	25,700	Total	25,700

The direct as well as indirect labor incurred have been recorded as wages payables.

The transactions recorded in T-account of Salary Payable for the month of January 2016 of H.C.C. Co. are as follows-

Dr	Salary Payable		Cr
Particulars	Amount ($)	Particulars	Amount ($)
		By Selling, General and Administrative Expenses	2,500
To Closing Balance	2,500
Total	2,500	Total	2,500

As the salary to administrative personnel is incurred but not paid, the same is represented as salary payable at the end of such period.

The transactions recorded in T-account of Sales Commissions Payable for the month of January 2016 of H.C.C. Co.are as follows-

Dr	Sales Commissions Payable		Cr
Particulars	Amount ($)	Particulars	Amount ($)
		By Selling, General and Administrative Expenses	1,800
To Closing Balance	1,800
Total	1,800	Total	1,800

The sales commissions are payable at the end of such period.

The transactions recorded in T-account of Accumulated Depreciation for the month of January 2016 of H.C.C. Co.are as follows-

Dr	Accumulated Depreciation		Cr
Particulars	Amount ($)	Particulars	Amount ($)
		By Manufacturing Overhead	9,000
		By Selling, General and Administrative Expenses	25,000
To Closing Balance	34,000
Total	34,000	Total	34,000

The depreciation expense for the period is recorded in respective heads.

The transactions recorded in T-account of Prepaid Insurance for the month of January 2016 of H.C.C. Co.are as follows-

Dr	Prepaid Insurance		Cr
Particulars	Amount ($)	Particulars	Amount ($)
To Opening Balance	9,000	By Manufacturing Overhead	5,400
		By Selling, General and Administrative Expenses	3,600
Total	9,000	Total	9,000

The prepaid insurance which has lapsed during the current period, has been transferred as an expense to respective heads.