1) Concept Introduction: Fixed and Variable Costs in Manufacturing: Variable costs refer to the costs of manufacture that have a direct co-relation with the volume of the goods manufactured, i.e. the costs increase with an increase in the goods produced. Examples are costs of direct material and direct labor. Fixed costs refer to the costs of manufacture that have an inverse co-relation with the volume of the goods manufactured, i.e. the costs decrease with an increase in the goods produced. Examples are costs of factory rent, depreciation on plant and equipment Manufacturing costs are costs that are directly incurred in connection with manufacture of goods. Examples are Direct materials and Manufacturing Overhead Journal Entries Journal entries are the first step in recording financial transactions and preparation of financial statements. These represent the impact of the financial transaction and demonstrate the effect on the accounts impacted in the form of debits and credits. Assets and expenses have debit balances and Liabilities and Incomes have credit balances To Prepare: Journal Entries to record transactions. Solution: Transaction Particulars Debit ($) Credit ($) a Raw Materials $ 200,000 Accounts Payables $ 200,000 (Being raw materials purchased on account) b Work in Process $ 185,000 Raw Materials $ 185,000 (Being raw materials used in production) c Manufacturing Overhead $ 63,000 Utility Expense $ 7,000 Accounts Payables $ 70,000 (Being Utility expenses relating to factory and selling and administrative expenses, distributed 90% to Factory and rest to selling and administrative activities) d Work in Process $ 230,000 Manufacturing Overhead $ 90,000 Salaries Expenses $ 110,000 Salaries and Wages Payable $ 430,000 (Being accrued Salaries and wages payable) e Manufacturing Overhead $ 54,000 Accounts Payables $ 54,000 (Being Maintenance expenses incurred on account) f Advertising Expenses $ 136,000 Accounts Payables $ 136,000 (Being Advertising expenses incurred on account) g Manufacturing Overhead $ 76,000 Depreciation Expense $ 19,000 Accumulated Depreciation $ 95,000 (Being depreciation relating to factory equipment and selling and administrative equipment, distributed 80% to Factory equipment and rest to selling and administrative equipment) h Manufacturing Overhead $ 102,000 Rent Expense $ 18,000 Accounts Payables $ 120,000 (Being Rent expenses relating to factory facilities and selling and administrative facilities , distributed 85% to Factory facilities and rest to selling and administrative facilities) i Work in Process $ 390,000 Manufacturing Overhead $ 390,000 (Being overhead applied at a pre-determined rate of $400 per direct labor hour for 975 Labor Hours, resulting in over application of overhead) j Finished Goods Inventory $ 770,000 Work in Process $ 770,000 (Being Cost of goods manufactured calculated by transferring the Work in Process) k Accounts Receivable $ 1,200,000 Sales $ 1,200,000 (Being Sales recorded) Cost of Goods Sold $ 800,000 Finished Goods $ 800,000 (Being Cost of Goods sold recorded) In case of Asset and Expenses accounts, the opening balance will be Debit Balance and in case of Liabilities and Incomes accounts, the opening balance is Credit Balance. Examples of Assets and Expenses − Assets - Raw Materials, Work In process, Finished Goods, Accounts Receivable Expenses - Manufacturing Overhead, Salary Expenses, Advertising Expenses, Rent Expenses, and Cost of Goods sold Examples of Liabilities and Incomes - Liabilities − Accounts Payable, Salaries Payable Incomes - Sales In order to increase balances of Asset and Expenses accounts, they are debited and in order to decrease the balances, they are credited In order to increase balances of Liability and Income accounts, they are credited and in order to decrease the balances, they are debited. Explanations for the journal entries are as follows: Raw Materials will be debited by $ 200,000 and Accounts Payables will be credited since raw materials purchased on account Work in Process will be debited by $ 185,000 and Raw Materials will be credited since raw materials used in production Manufacturing Overhead will be debited by $ 63,000 , Utility Expense will be debited by $ 7,000 and Accounts Payables will be credited by $70, 000 since Utility expenses relating to factory and selling and administrative expenses are distributed 90% to Factory and rest to selling and administrative activities Work In Process will be debited by $ 230,000, Manufacturing Overhead will be debited by $ 90,000, Salaries Expenses will be debited by $ 110,000 Factory Wages Payable will be credited since accrued Salaries and wages are payable Manufacturing Overhead will be debited by $ 54,000 and Accounts Payables will be credited since Maintenance expenses incurred on account Advertising Expenses will be debited by $ 136,000 and Accounts Payables will be credited since Advertising expenses incurred on account Manufacturing Overhead will be debited by $ 76,000, Depreciation Expense will be debited by $ 19,000 and Accumulated Depreciation will be credited since depreciation relating to factory equipment and selling and administrative equipment is distributed 80% to Factory equipment and rest to depreciation expense Manufacturing Overhead will be debited by $ 102,000 , Rent Expense will be debited by $ 18,000 and Accounts Payables will be credited since Rent expenses relating to factory facilities and selling and administrative facilities is distributed 85% to Factory facilities and rest to selling and administrative facilities Work in Process will be debited by $ 390,000 and Manufacturing Overhead will be credited since overhead applied at a pre-determined rate of $400 per direct labor hour for 975 Labor Hours, resulting in over application of overhead Finished Goods Inventory will be debited by $ 770,000, Work in Process will be credited by since Cost of goods manufactured calculated by transferring Work in Process. Accounts Receivable will be debited by $ 1,200,000 and Sales will be credited since Sales on account are recorded. Cost of Goods Sold will be debited by $ 800,000 and Finished Goods will be credited since Cost of Goods sold are recorded Hence, the transactions are journalized and entries are recorded. 2) Concept Introduction: T-Accounts T-Accounts are a graphical representation of the postings made to the accounts during a reporting period. The left side records the debit entries and the right side records the credit entries of an account. Depending on the nature of the account i.e. Balance Sheet or Profit and Loss Account, Income or Expense account etc. the account balances are reflected. In case of Asset and Expenses accounts, the opening balance will be Debit Balance and in case of Liabilities and Incomes accounts, the opening balance is Credit Balance. They help in analysis of the transactions impacting the accounts. To Prepare: T-Accounts for Inventory and Manufacturing Overhead and compute closing Balances Solution: Dr. Raw Materials Cr. Transaction Particulars Amount ($) Transaction Particulars Amount ($) Opening Balance $ 30,000.00 b Work in Process $ 185,000.00 A Accounts Payables $ 200,000.00 Balance $ 45,000.00 Dr. Work In Process Cr. Transaction Particulars Amount ($) Transaction Particulars Amount ($) Opening Balance $ 21,000.00 j Finished Goods $ 770,000.00 I Manufacturing Overhead $ 390,000.00 B Raw Materials $ 185,000.00 D Salaries and Wages Payable $ 230,000.00 Balance $ 56,000.00 Dr. Finished Goods Cr. Transaction Particulars Amount ($) Transaction Particulars Amount ($) Opening Balance $ 60,000.00 k Cost of Goods Sold $ 800,000.00 J Work in Process $ 770,000.00 Balance $ 30,000.00 Dr. Manufacturing Overhead Cr. Transaction Particulars Amount ($) Transaction Particulars Amount ($) C Accounts Payables $ 63,000.00 i Work in process $ 390,000.00 D Salaries and Wages Payable $ 90,000.00 E Accounts Payables $ 54,000.00 G Accumulated Depreciation $ 76,000.00 H Accounts Payables $ 102,000.00 Balance $ 5,000.00 Raw Materials will be debited by $ 200,000 and Accounts Payables will be credited since raw materials purchased on account Work in Process will be debited by $ 185,000 and Raw Materials will be credited since raw materials used in production Manufacturing Overhead will be debited by $ 63,000 , Utility Expense will be debited by $ 7,000 and Accounts Payables will be credited by $70, 000 since Utility expenses relating to factory and selling and administrative expenses are distributed 90% to Factory and rest to selling and administrative activities Work In Process will be debited by $ 230,000, Manufacturing Overhead will be debited by $ 90,000, Salaries Expenses will be debited by $ 110,000 Factory Wages Payable will be credited since accrued Salaries and wages are payable Manufacturing Overhead will be debited by $ 54,000 and Accounts Payables will be credited since Maintenance expenses incurred on account Manufacturing Overhead will be debited by $ 76,000 and Accumulated Depreciation will be credited since depreciation relating to factory equipment and selling and administrative equipment is distributed 80% to Factory equipment and rest to depreciation expense Manufacturing Overhead will be debited by $ 102,000 and Accounts Payables will be credited since Rent expenses relating to factory facilities and selling and administrative facilities is distributed 85% to Factory facilities and rest to selling and administrative facilities Work in Process will be debited by $ 390,000 and Manufacturing Overhead will be credited since overhead applied at a pre-determined rate of $400 per direct labor hour for 975 Labor Hours, resulting in over application of overhead Finished Goods Inventory will be debited by $ 770,000, Work in Process will be credited by since Cost of goods manufactured calculated by transferring Work in Process. Hence, the closing balances are computed and T-Accounts have been prepared. 3) Concept Introduction: Schedule of Cost of Goods Manufactured: The Schedule of Cost of Goods Manufactured is used to compute the cost of producing goods for a particular period. It comprises of Cost of Materials, Labor and Overhead attributable to goods manufactured. Cost of goods manufactured is the total cost of producing goods that are later sold to realize revenues. It includes direct and indirect materials, labor and overhead. To Prepare: Schedule of Cost of Goods Manufactured Solution: Direct Materials Used: Beginning Materials Inventory 30,000 Add: Cost of Raw Materials Purchased 200,000 Total Raw Materials Available 230,000 Less: Closing Materials Inventory (45,000) Total Raw Materials Used 185,000 Direct Labor 230,000 Manufacturing Overhead Indirect Labor 90,000 Rent 102,000 Utilities 63,000 Depreciation 76,000 Maintainance Expenses 54,000 Total Manufacturing Overhead 385,000 Total Manufacturing Costs 800,000 Add: Beginning Work In Progress Inventory 21,000 Less: Closing Work In Progress Inventory 56,000 Cost Of Goods Manufactured 765,000 The cost of goods manufactured is a sum of the direct material, labor and manufacturing overhead attributable to the product. The direct material is calculated by adding the beginning raw materials inventory to the cost of raw materials purchased and reducing the balance of ending raw materials inventory. The opening and closing balances of Raw materials along with the cost of purchases are given. These are used to calculate the cost of material consumed. Direct labor and Manufacturing Overhead are also calculated. These along with cost of materials help in ascertaining the total manufacturing costs. Manufacturing overhead is considered at actuals and not at the rate of application of overhead. The opening and closing balance of Work in progress are given. The cost of manufacturing goods is calculated by adding the beginning Work in progress inventory to the cost of material, labor and overhead and reducing the balance of ending Work in progress inventory. Hence, the cost of goods manufactured is $765,000. 4) Concept Introduction: Application of Overhead Overhead refers to the various types of costs associated with the costs of production. These can include direct over heads such as factory rent, factory electricity expenses etc or indirect overheads such as depreciation, insurance expenses etc. The application of overhead means allocation of costs of production that are attributable to the goods manufactured in a fixed proportion or method of allocation. The difference between the actual manufacturing overhead and the applied manufacturing overhead is the under application or over application of overhead. Journal Entries Journal entries are the first step in recording financial transactions and preparation of financial statements. These represent the impact of the financial transaction and demonstrate the effect on the accounts impacted in the form of debits and credits. Assets and expenses have debit balances and Liabilities and Incomes have credit balances Cost of Goods Sold The Schedule of Cost of Goods sold is used to compute the cost of goods sold in a particular period. Cost of goods sold comprises of the cost of Goods manufactured along with the effect of the change in inventory of the finished goods. The cost of goods manufactured is a sum of the direct material, labor and manufacturing overhead attributable to the product. To Compute: Cost of Goods Sold and close balance of Manufacturing Overhead by passing suitable journal entries Solution: Date Particulars Debit ($) Credit ($) 12.31.18 Manufacturing Overhead 5,000 Cost of Goods Sold 5,000 (Being Over applied overhead closed to Cost of Goods Sold) Schedule of Cost Of Goods Sold Beginning Finished Goods Inventory 60,000 Cost of Goods Manufactured 765,000 Total Goods Available for Sale 825,000 Ending Finished Goods Inventory 30,000 Overapplied Overhead 5,000 Cost of Goods Sold 800,000 The application of overhead to work in progress in a pre-determined rate often results in under or over absorption of the overhead. The difference between the applied overhead and the actual overhead is the under or over application of the overhead. When the actual overhead is greater than the applied overhead, it results in under application of the manufacturing overhead. When the actual overhead is less than the applied overhead, it results in over application of the manufacturing overhead. Over applied overhead is a favorable variance since it results in a lower than expected cost of goods sold. The cost of Goods sold is calculated by adding the beginning finished goods inventory to the cost of goods manufactured and reducing the balance of ending finished goods inventory. The cost of goods manufactured is a sum of the direct material, labor and manufacturing overhead attributable to the product. The opening and closing balances of finished goods inventory are given in the question. These are used to ascertain the actual cost of goods sold. The over applied Manufacturing Overhead is transferred to the cost of goods sold and it is calculated accordingly Hence, the transaction of transferring the manufacturing overhead balance to cost of goods sold is journalized and the cost of goods sold is $ 800,000. 5) Concept Introduction: Income Statement: Income Statement is a record of the revenues goods sold, expenses of direct and indirect nature, and the change in inventory. The difference between the revenues and expenses is the profit or loss for the reporting period. The profit or loss for the period is transferred to the Balance Sheet. To Prepare: Income Statement for the year Solution: Income Statement Sales 1,200,000 Cost of Goods Sold Beginning Finished Goods Inventory 60,000 Cost of Goods Manufactured 765,000 Total Goods Available for Sale 825,000 Ending Finished Goods Inventory 30,000 Over applied Overhead 5,000 Cost of Goods Sold 800,000 Gross Profit 400,000 Operating Expenses Selling and Administrative Expenses Utilities 7,000 Salaries and Wages 110,000 Depreciation 19,000 Rental Cost 18,000 Advertising Expenses 136,000 Total Operating Expenses 290,000 Income From Operations 110,000 The Income statement is a record of the various expenses such as cost of goods manufactured, and revenues such as sales revenue. Income from operations is calculated as $110,000. This is the difference between the Gross Profit and the Operating Expenses. Selling and Administrative Expenses of $ 290,000 are calculated based on the various transactions occurring during the reporting period. These constitute the Total Operating Expenses. The difference of Net Income from Sales and Total Cost of Goods Sold is the Gross Profit. The Cost of Goods Sold is given as $800,000. The ending finished goods inventory is calculated as a difference of the Cost of Goods sold and the Cost of Goods available for Sale. The beginning finished goods inventory is given as $60,000. Sales of $ 1,200,000 are given. The cost of Goods sold is calculated by adding the beginning finished goods inventory Hence, Income Statement has been prepared and the net income from operations is $110,000.

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