Chapter 3, Problem 1PB

Entries for process cost system

Preston & Grover Soap Company manufactures powdered detergent. Phosphate is placed in process in the Making Department, where it is turned into granulars. The output of Making is transferred to the Packing Department, where packaging is added at the beginning of the process. On July 1, Preston & Grover Soap Company had the following inventories:

Departmental accounts are maintained for factory overhead, which both have zero balances on July 1.

Manufacturing operations for July are summarized as follows:

Instructions

1. 1. Journalize the entries to record the operations, identifying each entry by letter.
2. 2. Compute the July 31 balances of the inventory accounts.
3. 3. Compute the July 31 balances of the factory overhead accounts.

To determine

Journalize the entry to record material purchased on account of Company PGS.

Explanation of Solution

Work in process costs

It is the cost of production process that is used to manufacture partly completed products. It comprises the cost of raw materials, labor, and overhead that incurred for the production process of the products at various phases.

Direct materials cost

Manufacturing products arise with raw materials that are altered into finished products. The cost of any material that is an important part of the finished product is categorized as a direct materials cost.

Conversion cost

Cost of changing the materials into a finished product. It includes direct labor costs and factory overhead costs.

 (A) Prepare the journal entry to record material purchased on account of Company PGS as shown below:

Account title and Explanation	Debit	Credit
Materials	$149,800
Accounts payable		$149,800
(To record material purchased on account)

Table (1)

• • Materials inventory is a current asset and increased. Therefore, debit material account for $149,800.
• • Accounts payable is a current liability and increased. Therefore, credit accounts payable account for $149,800.

(B) Prepare the journal entry to record material requisition used for production of Company PGS as shown below:

Account title and Explanation	Debit	Credit
Work in process - Making Department	$105,700
Work in process - Packing Department	$31,300
Factory overhead - Making Department	$4,980
Factory overhead - Packing Department	$1,530
Materials		$143,510
(To record materials used in production)

Table (2)

• • Work in process inventory – making department is a current asset account, and increased. Therefore, debit work in process – making department account for $105,700.
• • Work in process inventory – packing department is a current asset account, and increased. Therefore, debit work in process – packing department account for $31,300.
• • Factory overhead – making department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – making department account for $4,980.
• • Factory overhead – packing department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – packing department account for $1,530.
• • Materials inventory is a current asset, and decreased it. Therefore, credit material account for $143,510.

(C) Prepare the journal entry to record labor used for production of Company PGS as shown below:

Account title and Explanation	Debit	Credit
Work in process - Making Department	$32,400
Work in process - Packing Department	$40,900
Factory overhead - Making Department	$15,400
Factory overhead - Packing Department	$18,300
Wages payable		$107,000
(To record labor cost incurred for production)

Table (3)

• • Work in process inventory – making department is a current asset account, and increased. Therefore, debit work in process – making department account for $32,400.
• • Work in process inventory – packing department is a current asset account, and increased. Therefore, debit work in process – packing department account for $40,900.
• • Factory overhead – making department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – making department account for $15,400.
• • Factory overhead – packing department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – packing department account for $18,300.
• • Wages payable is a current liability, and increased. Therefore, credit wages payable account for $107,000.

(D) Prepare the journal entry to record accumulated depreciation on fixed asset of Company PGS as shown below:

Account title and Explanation	Debit	Credit
Factory Overhead - Making Department	$10,700
Factory Overhead - Packing Department	$7,900
Accumulated depreciation – fixed asset		$18,600
(To record accumulated depreciation for fixed asset)

Table (4)

• • Factory overhead – Making department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – Making department account for $10,700.
• • Factory overhead – Packing department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – Packing department account for $7,900.
• • Accumulated depreciation – fixed asset is a contra asset, and increased. Therefore, credit accumulated depreciation – fixed asset account for $18,600.

(E) Prepare the journal entry to record expired factory insurance of Company PGS as shown below:

Account title and Explanation	Debit	Credit
Factory Overhead – Making Department	$2,000
Factory Overhead - Packing Department	$1,500
Prepaid insurance		$3,500
(To record expired prepaid factory insurance)

Table (5)

• • Factory overhead – Making department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – Making department account for $2,000.
• • Factory overhead – Packing department is a component of stockholders’ equity, and decreased it. Therefore, debit factory overhead – Packing department account for $1,500.
• • Prepaid insurance is a current asset, and decreased. Therefore, credit prepaid insurance account for $3,500.

(F) Prepare the journal entry to record applied factory overhead of Company PGS as shown below:

Account title and Explanation	Debit	Credit
Work in process – Making Department	$32,570
Work in process - Packing Department	$30,050
Factory overhead – Making Department		$32,570
Factory overhead - Packing Department		$30,050
(To record allocation of factory overhead)

Table (6)

• • Work in process inventory – Making department is a current asset account, and increased. Therefore, debit work in process – Making department account for $32,570.
• • Work in process inventory – Packing department is a current asset account, and increased. Therefore, debit work in process – Packing department account for $30,050.
• • Factory overhead – Making department is a component of stockholders’ equity, and increased it. Therefore, credit factory overhead – Making department account for $32,570.
• • Factory overhead – Packing department is a component of stockholders’ equity, and decreased it. Therefore, credit factory overhead – Packing department account for $30,050.

(G) Prepare the journal entry to record production costs transferred from making department to packing department of Company PGS as shown below:

Account title and Explanation	Debit	Credit
Work in process - Packing Department	$166,790
Work in process – Making Department		$166,790
(To record production costs transferred from Making department to Packing department)

Table (7)

• • Work in process inventory – Making department is a current asset account, and increased. Therefore, debit work in process – Making department account for $166,790.
• • Work in process inventory – Packing department is a current asset account, and decreased. Therefore, credit work in process – Packing department account for $166,790.

 (H) Prepare the journal entry to record production costs transferred from Packing department to finished goods of Company PGS as shown below:

Account title and Explanation	Debit	Credit
Finished goods	$263,400
Work in process - Packing Department		$263,400
(To record production costs transferred from Packing department to Finished goods)

Table (8)

• • Finished goods inventory is a current asset, and increased. Therefore, debit finished goods account for $263,400.
• • Work in process inventory – Packing department is a current asset, and decreased. Therefore, credit work in process – Packing department account for $263,400.

(I) Prepare the journal entry to record cost of goods sold during the period of Company PGS as shown below:

Account title and Explanation	Debit	Credit
Cost of Goods sold	$265,200
Finished goods		$265,200
(To record cost of goods sold during the period)

Table (9)

• • Cost of goods sold is a component of stockholders’ equity, and increased it. Therefore, debit cost of goods sold account for $265,200.
• • Finished goods inventory is a current asset, and decreased. Therefore, credit finished goods account for $265,200.

To determine

Compute the ending balance of inventory accounts of Company PGS.

Explanation of Solution

Calculate ending balance of inventory account of Company PGS as shown below:

Particulars	Amount
	Materials	Work in Process – Making Department	Work in Process - Packing Department	Finished Goods
Balance, July 1	$5,100	$6,790	$7,350	$13,500
Add: Debit balance	$149,800	$170,670	$269,040	$263,400
Less: Credit balance	$143,510	$166,790	$263,400	$265,200
Balance, July 31	$11,390	$10,670	$12,990	$11,700

Table (10)

Working notes:

Calculate debit balance for work in process – Making department of Company PGS as shown below:

  $\begin{array}{c}\begin{array}{l}\text{Debit balance for work in }\\ \text{process - making department}\end{array})\text{ =}\$105,700+\$32,400+\$32,570\\ \text{=}\text{\$170,670}\end{array}$

Calculate debit balance for work in process – Packing department of Company PGS as shown below:

$\begin{array}{c}\begin{array}{l}\text{Credit balance for work in }\\ \text{process - packing department}\end{array})\text{ =}\text{\$31,300}\text{+}\$40,900+\$30,050+\$166,790\\ \text{=}\text{\$269,040}\end{array}$

Ending balance of inventory account is calculated by adding opening balance of inventory, debit balance and then deduct with credit balance. Hence, ending balance for materials is $11,390 (debit balance), ending balance for work in process – Making department is $10,670 (debit balance), ending work in process - Packing department is $12,990 (debit balance), and ending balance for finished goods is $11,700 (debit balance).

To determine

Compute the ending balance of factory overhead accounts of Company PGS.

Explanation of Solution

Calculate ending balance of factory overhead accounts of Company PGS as shown below:

Particulars	Amount
	Factory Overhead – Making Department	Factory Overhead - Packing Department
Balance, July 1	$0	$0
Add: Debit balance	$33,080	$29,230
Less: Credit balance	$32,570	$30,050
Balance, July 31	$510	($820)

Table (11)

Working notes:

Calculate credit balance for factory overhead– Making department of Company PGS as shown below:

  $\begin{array}{c}\begin{array}{l}\text{Credit balance for factory }\\ \text{overhead - making department}\end{array})\text{ =}\text{\$4,930}\text{+\$15,400}\text{+\$10,700 +}\text{\$2,000}\\ \text{=}\text{\$33,080}\end{array}$

Calculate debit balance for factory overhead – Packing department of Company PGS as shown below:

  $\begin{array}{c}\begin{array}{l}\text{Credit balance for factory }\\ \text{overhead - packing department}\end{array})\text{ =}\text{\$1,530}\text{+\$18,300}\text{+\$7,900}\text{+\$2,000}\\ \text{=}\text{\$29,230}\end{array}$

Ending balance of factory overhead account is calculated by adding opening balance of factory overhead, debit balance and then deduct with credit balance. Hence, ending balance of factory overhead – Making department is $510 (debit balance), and ending balance of factory overhead – Packing department is $820 (credit balance).