Chapter 26, Problem 10SPA

JOB ORDER COSTING WITH UNDER- AND OVERAPPLIED FACTORY OVERHEAD M. Evans & Sons manufactures parts for radios. For each job order, it maintains ledger sheets on which it records direct labor, direct materials, and factory overhead applied. The factory overhead control account contains postings of actual overhead costs. At the end of the month, the under- or over applied factory overhead is charged to the cost of goods sold account.

Factory overhead is applied on the basis of direct labor hours. For Job Nos. 101, 102,103, and 104, direct labor hours are 12, 000, 10,000, 11, 000, and 18,000, respectively. The overhead application rate is $1.20/direct labor hour.

1. (a) Purchased raw materials on account, $50,000.
2. (b) Issued direct materials:

1. (c) Issued indirect materials to production, $8,000.
2. (d) Incurred direct labor costs:

1. (e) Charged indirect labor to production, $15,000.
2. (f) Paid electricity bill, taxes, and repair fees for the factory and charged to production, $8,000.
3. (g) Depreciation expense on factory equipment, $30,000.
4. (h) Applied factory overhead to Job Nos. 101–104 using the predetermined factory overhead rate (see above).
5. (i) Finished Job Nos. 101–103 and transferred to the finished goods inventory account as products N, O, and P.
6. (j) Sold products N and О for $50,000 and $45,400, respectively.
7. (k) Transferred under- or over applied factory overhead balance to the cost of goods sold account.

REQUIRED

1. 1. Prepare general journal entries to record transactions (a) through (k).
2. 2. Post the entries to the work in process and finished goods Τ accounts only and determine the ending balances in these accounts.
3. 3. Compute the balance in the job cost ledger and verify that this balance agrees with that in the work in process control account.

To determine

Prepare general journal entries to record transactions (a) through (k).

Explanation of Solution

Job order costing:

Job order costing is one of the methods of cost accounting under which cost is collected and gathered for each job, work order, or project separately. It is a system by which a factory maintains a separate record of each particular quantity of product that passes through the factory. Job order costing is used when the products produced are significantly different from each other.

Prepare journal entry to record the given transactions.

Date	Accounts title and explanation	Debit ($)	Credit ($)
a.	Material	50,000
	Accounts payable		50,000
	(To record the purchase of materials on account.)
b.	Work in process	10,000
	Work in process	8,000
	Work in process	9,000
	Work in process	15,000
	Materials		42,000
	(To record issuance of  direct materials for the job: job no.101,102,103,104)
c.	Factory overhead	8,000
	Materials		8,000
	(To record the issuance of  indirect materials)
d.	Work in process	22,000
	Work in process	19,000
	Work in process	20,500
	Work in process	30,000
	Wages payable		91,500
	(To record direct labor incurred for the job: job no.101,102,103,104)
e.	Factory overhead	15,000
	Wages payable		15,000
	(To record the indirect labor charged to production)
f.	Factory overhead	8,000
	Cash		8,000
	(To record the payment of electricity bill, heating  oil, and repairs bills for the factory and charge made to production)
g.	Factory overhead	30,000
	Accumulated depreciation		30,000
	(To record the depreciation expense on factory equipment)
h.	Work in process $\left[\$12,000\times \$1.20\right]$	14,400
	Work in process $\left[\$10,000\times \$1.20\right]$	12,000
	Work in process $\left[\$11,000\times \$1.20\right]$	13,200
	Work in process $\left[\$18,000\times \$1.20\right]$	21,600
	Factory  overhead		61,200
	(To record  applied factory overhead to the job: job no.101,102,103,104)
i.	Finished goods (Product N) $\left[\$10,000+\$22,000+\$14,400\right]$	46,400
	Work in process		46,400
	(To record the transfer of Job no. 101 to  Product N)
	Finished goods (Product O) $\left[\$8,000+\$19,000+\$12,000\right]$	39,000
	Work in process		39,000
	(To record the transfer of Job no.102 to  Product O)
	Finished goods (Product P) $\left[\$9,000+\$20,500+\$13,200\right]$	42,700
	Work in process		42,700
	(To record the transfer of Job no.103 to  Product P)
j.	Accounts receivable	50,000
	Sales		50,000
	(To record sale of product N)
	Cost of goods sold $\left[\$10,000+\$22,000+\$14,400\right]$	46,400
	Finished goods (Product N)		46,400
	(To record cost of goods sold on finished goods of Product N)
	Accounts receivable	45,400
	Sales		45,400
	(To record sale of product O)
	Cost of goods sold  $\left[\$8,000+\$19,000+\$12,000\right]$	39,000
	Finished goods (Product O)		39,000
	(To record cost of goods sold on finished goods of Product O)
k.	Factory  overhead	200
	Cost of goods sold (2)		200
	(To record cost of  goods sold)

 (Table 1)

Working note:

(1) Calculate the actual factory overhead:

 $\begin{array}{c}\text{Actual factory overhead = }\left(\begin{array}{l}\text{Indirect materials+Indirect labor+}\\ \text{Payment of electricity bill+}\\ \text{Depreciation expense}\end{array}\right)\\ =\$8,000+\$15,000+\$8,000+\$30,000\\ =\$61,000\end{array}$

(2) Calculate the cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold = Actual factory overhead}-\text{Applied factory overhead}\\ \text{=\$61,000(1)}-\$61,200\\ =\$200\text{(overapplied)}\end{array}$

To determine

Post the entries to the work in process and finished goods T accounts and determine the ending balances in these accounts.

Explanation of Solution

Post the entries to the work in process and finished goods T accounts and determine the ending balances in these accounts.

To determine

Compute the balance in the job cost ledger and verify whether the balance agrees with that in the work in process control account.

Explanation of Solution

The balance of the job cost ledger (Job No.104) is $66,600 $\left[\$15,000+\$30,000+\$21,600s\right]$ is balances with the work in process control account of $66,600.