Chapter 3, Problem 57P

Scholastic Brass Corporation manufactures brass musical instruments for use by high school students. The company uses a normal costing system, in which manufacturing overhead is applied on the basis of direct-labor hours. The company’s budget for the current year included the following predictions.

During March, the firm worked on the following two production jobs:

Job number T81, consisting of 76 trombones

Job number C40, consisting of 110 cornets

The events of March are described as follows:

1. a. One thousand square feet of rolled brass sheet metal were purchased on account for $5,000.
2. b. Four hundred pounds of brass tubing were purchased on account for $4,000.
3. c. The following requisitions were submitted on March 5:

   Requisition number 112: 250 square feet of brass sheet metal at $5 per square foot (for job number T81)

   Requisition number 113: 1,000 pounds of brass tubing, at $10 per pound (for job number C40)

   Requisition number 114: 10 gallons of valve lubricant, at $10 per gallon

   All brass used in production is treated as direct material. Valve lubricant is an indirect material.

4. d. An analysis of labor time cards revealed the following labor usage for March.

   Direct labor: Job number T81, 800 hours at $20 per hour

   Direct labor: Job number C40, 900 hours at $20 per hour

   Indirect labor: General factory cleanup, $4,000

   Indirect labor: Factory supervisory salaries, $9,000

5. e. Depreciation of the factory building and equipment during March amounted to $12,000.
6. f. Rent paid in cash for warehouse space used during March was $1,200.
7. g. Utility costs incurred during March amounted to $2,100. The invoices for these costs were received, but the bills were not paid in March.
8. h. March property taxes on the factory were paid in cash, $2,400.
9. i. The insurance cost covering factory operations for the month of March was $3,100. The insurance policy had been prepaid.
10. j. The costs of salaries and fringe benefits for sales and administrative personnel paid in cash during March amounted to $8,000.
11. k. Depreciation on administrative office equipment and space amounted to $4,000.
12. l. Other selling and administrative expenses paid in cash during March amounted to $1,000.
13. m. Job number T81 was completed on March 20.
14. n. Half of the trombones in job number T81 were sold on account during March for $700 each.

The March 1 balances in selected accounts are as follows:

Required:

1. 1. Calculate the company’s predetermined overhead rate for the year.
2. 2. Prepare journal entries to record the events of March.
3. 3. Set up T-accounts, and post the journal entries made in requirement (2).
4. 4. Calculate the over applied or under applied overhead for March. Prepare a journal entry to close this balance into Cost of Goods Sold.
5. 5. Prepare a schedule of cost of goods manufactured for March.
6. 6. Prepare a schedule of cost of goods sold for March.
7. 7. Prepare an income statement for March.

To determine

Compute the predetermined overhead rate for Corporation SB.

Explanation of Solution

Predetermined Overhead Rate: Predetermined overhead rate is a measure used to allocate the estimated manufacturing overhead cost to the products or job orders during a particular period. This is generally evaluated at the beginning of each reporting period. The evaluation takes into account the estimated manufacturing overhead cost and the estimated allocation base that includes direct labor hours, direct labor in dollars, machine hours and direct materials.

Compute the predetermined overhead rate for Corporation SB.

$\begin{array}{c}\text{Predetermined overhead rate}=\frac{\text{Budgeted manufacturing overhead}}{\text{Budgeted direct-labor hours}}\\ =\frac{\$426,300}{20,300}\\ =\$21\text{ per direct-labor hour}\end{array}$

Thus, the predetermined overhead rate for Corporation SB is $21 per direct-labor hour.

To determine

Record the events in the books of Corporation SB for the month of March.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Record the events in the books of Corporation SB for the month of March.

Date	Account title and explanation	Debit ($)	Credit ($)
a)	Raw-material inventory	5,000
	Accounts payable		5,000
	(To record the purchase of raw materials on account)
b)	Raw-material inventory	4,000
	Accounts payable		4,000
	(To record the purchase of raw materials on account)
c)	Work-in-process inventory $\left(250\text{sq}\text{.ft}\times \text{\$5per sq}\text{.ft}\right)+\left(1,000\text{lbs}\times \text{\$10 per lb}\text{.}\right)$	11,250
	Raw-material inventory		11,250
	(To record the raw-material inventory)
	Manufacturing overhead $\left(10\text{gallons}\times \$10\text{per gallon}\right)$	100
	Wages payable		100
	(To record the wages payable)
d)	Work-in-process inventory	34,000
	Manufacturing overhead	13,000
	Wages payable		47,000
	(To record the labor usage during March)
	Work-in-process inventory	35,700
	Manufacturing overhead $\left(1,700\text{Direct labor hours}\times \text{\$21per hour}\right)$		35,700
	(To record the manufacturing overhead)
e)	Manufacturing overhead	12,000
	Accumulated depreciation: Building and equipment		12,000
	(To record the depreciation expense for building and equipment)
f)	Manufacturing overhead	1,200
	Cash		1,200
	(To record the payment of rent in cash)
g)	Manufacturing overhead	2,100
	Accounts payable		2,100
	(To record the utilities cost incurred during March)
h)	Manufacturing overhead	2,400
	Cash		2,400
	(To record the payment of property taxes)
i)	Manufacturing overhead	3,100
	Prepaid insurance		3,100
	(To record the prepaid insurance)
j)	Selling and administrative expenses	8,000
	Cash		8,000
	(To record the selling and administrative expenses)
k)	Selling and administrative expenses	4,000
	Accumulated depreciation: Buildings and equipment		4,000
	(To record the depreciation expense for office equipment)
l)	Selling and administrative expenses	1,000
	Cash		1,000
	(To record the payment of other selling and administrative expenses)
m)	Finished goods inventory (1)	34,050
	Work-in-process inventory		34,050
	(To record the job completed during March 20.)
n)	Accounts receivable $\left(\frac{76}{2}\times \$700\text{Per trombone}\right)$	26,600
	Sales revenue		26,600
	(To record the sales revenue)
	Cost of goods sold $\left(\frac{\$34,050}{2}\right)$	17,025
	Finished goods inventory		17,025
	(To record the cost of goods sold)

Table (1)

Working note (1):

Calculate the amount of finished goods inventory.

Particulars	Amount ($)
Direct material $\text{(250}\times \text{\$5)}$	$1,250
Direct labor $\text{(800}\times \text{\$20)}$	$16000
Manufacturing overhead $\text{(800}\times \text{\$21)}$	$16,800
Total cost	$34,050

Table (2)

To determine

Prepare the T-accounts and post the journal entries.

Explanation of Solution

T-account: The condensed form of a ledger is referred to as T-account. The left-hand side of this account is known as debit, and the right hand side is known as credit.

Prepare the T-accounts and post the journal entries.

To determine

Compute the overapplied or underapplied overhead for March and close the balance into cost of goods sold.

Explanation of Solution

Step 1: Calculate the amount of actual overhead.

Particulars	Amount ($)
Indirect material (valve lubricant)	$100
Indirect labor	$13,000
Depreciation: factory building and equipment	$12,000
Rent: warehouse	$1,200
Utilities	$2,100
Property taxes	$2,400
Insurance	$3,100
Total actual overhead	$33,900

Table (3)

Step 2: Calculate the amount of applied manufacturing overhead.

$\begin{array}{c}\text{Applied manufacturing overhead}=\left(\text{Direct-labor hours}\times \text{Rate per hour}\right)\\ =\left(1,700\text{ direct-labor hours}\times \text{\$21per hours}\right)\\ =\$35,700\end{array}$

Step 3: Calculate the overapplied or underapplied overhead.

$\begin{array}{c}\text{Overapplied or underapplied overhead}=\left(\begin{array}{l}\text{Actual manufacturing overhead}-\\ \text{Applied manufacturing overhead}\end{array}\right)\\ =\left(\$33,900-\$35,700\right)\\ =\$1,800\left(\text{Overapplied}\right)\end{array}$

Step 4: Prepare the journal entry to close the cost of goods sold.

Date	Account title and explanation	Debit ($)	Credit ($)
	Manufacturing overhead	1,800
	Cost of goods sold		1,800
	(To close the overapplied manufacturing overhead to cost of goods sold)

Table (4)

To determine

Prepare a schedule of cost of goods manufactured for March.

Explanation of Solution

Cost of goods manufactured: Cost of goods manufactured refers to the cost incurred for a making a product, that are available for sales at the end of the accounting period.

Prepare a schedule of cost of goods manufactured for March.

Corporation SC
Schedule of Cost of Goods Manufactured
For the Month of March
Particulars	Amount ($)	Amount ($)
Direct material:
Raw-material inventory, March 1	$149,000
Add: March purchases of raw material	$9,000
Raw material available for use	$158,000
Deduct: Raw-material inventory, March 31	$146,750
Raw material used		$ 11,250
Direct labor		$34,000
Manufacturing overhead:
Indirect material	$100
Indirect labor	$13,000
Depreciation on factory building and equipment	$12,000
Rent: Warehouse	$1,200
Utilities	$2,100
Property taxes	$2,400
Insurance	$3,100
Total actual manufacturing overhead	$33,900
Add: overapplied overhead	$1,800
Overhead applied to work in process		$35,700
Total manufacturing costs		$80,950
Add: Work-in-process inventory, March 1		$91,000
Subtotal		$171,950
Deduct: Work-in-process inventory, March 31		$137,900
Cost of goods manufactured		$34,050

Table (5)

Thus, the cost of goods manufactured is $34,050.

To determine

Prepare the schedule of cost goods sold for March.

Explanation of Solution

Schedule of cost of goods sold: The schedule which reports all the expenses incurred by a company to sell the goods during the given period.

Prepare the schedule of cost goods sold for March.

Corporation SC
Schedule of Cost of Goods Sold
For the Month of March
Particulars	Amount ($)
Finished-goods inventory, March 1	$220,000
Add: Cost of goods manufactured	$34,050
Cost of goods available for sale	$254,050
Deduct: Finished-goods inventory, March 31	$237,025
Cost of goods sold	$17,025
Deduct: Overapplied overhead	$1,800
Cost of goods sold (adjusted for overapplied overhead)	$15,225

Table (6)

Thus, the cost of goods sold is $15,225.

To determine

Prepare an income statement for March.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare an income statement for March.

Corporation SC
Income Statement
For the Month of March
Particulars	Amount ($)
Sales revenue	$26,600
Less: Cost of goods sold	$15,225
Gross margin	$11,375
Selling and administrative expenses	$13,000
Income (loss)	($1,625)

Table (7)

Thus, there is a net loss for the month of March amounts to ($1,625).