Chapter 4, Problem 43P

1.

To determine

Calculate predetermined factory overhead rate.

Explanation of Solution

Predetermined factory overhead rate: Factory overhead cost are applied or allocated to cost of job based on predetermined factory overhead rate.

Cost of goods sold: Cost of goods sold is the total of all the expenses incurred by a company to sell the goods during the given period.

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

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.

Calculate predetermined factory overhead rate.

$\begin{array}{c}\text{Predetermined overhead rate}=\frac{\text{Budgeted factory overhead}}{\text{Direct labor hour}}\\ =\frac{\$455,6000}{\text{33,500}}\\ =\$13.60\text{ per direct labor hour}\end{array}$

Therefore, predetermined factory overhead rate is $13.60 per direct labor hour.

2.

To determine

Prepare journal entries.

Explanation of Solution

Prepare journal entries.

Date	Description	Post Ref	Debit ($)	Credit($)
a.	Factory overhead		1,800
	Prepaid insurance			1,800
	(To record prepaid insurance)
b.	Selling & administrative expense		1,025
	Accumulated depreciation			1,025
	(To record depreciation on administrative asset)
c.	Material inventory		336
	Accounts payable (1)			336
	(To record purchase of polishing materials)
d.	Factory overhead		6,510
	Cash			6,510
	(To record payment factory utility )
e.	Work-in-process inventory		140,000
	Factory overhead		20,000
	Cash			160,000
	(To record payment factory utility )
f.	Factory overhead		6,270
	Cash			6,270
	(To record payment factory overhead)
g.	Material inventory		24,500
	Accounts payable			24,500
	(To record purchase of unpolished semi-precious stones and gold)
h.	Work-in-process inventory		18,500
	Factory overhead		1,600
	Material inventory			20,100
	(To record requisition of direct materials)
i.	Selling & administrative expense		5,660
	Cash			5,660
	(To record incurred miscellaneous selling and administrative expenses)
j.	Factory overhead		3,505
	Accumulated depreciation			3,505
	(To record depreciation on manufacturing equipment)
k.	Advertising expense		2,650
	Cash			2,650
	(To record advertising expense)
l.	Work-in-process		40,800
	Factory overhead (2)			40,800
	(To record factory overhead)
m.	Finished goods inventory		64,000
	Work-in-process inventory			64,000
	(To record finished goods)
n.	Accounts receivable		56,410
	Sales revenue			56,410
	(To record sales)
n.	Cost of goods sold		47,860
	Finished goods inventory			47,860
	(To record cost of goods sold)

Table (1)

Working Notes (1): Calculate the accounts payable.

$\begin{array}{c}\text{Accounts Payable}=\left(\begin{array}{l}\text{Indirect material cost}\\ \times \left(\begin{array}{l}\text{Purchase of high-grade}\\ \text{polishing materials}\end{array}\right)\end{array}\right)\\ =\$16\times 21\\ =\$336\end{array}$

(2) Calculate the factory overhead.

$\begin{array}{c}\text{Factory overhead}=\left(\begin{array}{l}\text{Predetermined overhead rate}\\ \times \text{Direct labor hour}\left(3\right)\end{array}\right)\\ =\$13.60\times 3,000\\ =\$40,800\end{array}$

(3) Calculate the direct labor.

$\begin{array}{c}\text{Direct labor hour}=\left(\begin{array}{l}\text{Total hours}\\ -\text{Indirect hours}\end{array}\right)\\ =4,000-1,000\\ =3,000\end{array}$

3.

To determine

Compute the amount of overapplied or underapplied overhead.

Explanation of Solution

Compute the actual overhead.

$\begin{array}{c}\text{Actual overhead}=\left(\begin{array}{l}\$1,800+\$6,510+\$20,000\\ \$6,270+\$1,600+\$3,505\end{array}\right)\\ =\$39,685\end{array}$

Compute the amount of overapplied or underapplied overhead.

$\begin{array}{c}\text{Overapplied overhead}=\left(\begin{array}{l}\text{Applied overhead}\\ -\text{Actual overhead}\end{array}\right)\\ =\$40,800-\$39,685\\ =\$1,115\end{array}$

Therefore, the amount of overapplied or underapplied overhead is $1,115.

4.

To determine

Prepare a schedule of cost of goods sold cost of goods manufactured.

Explanation of Solution

Prepare a schedule of cost of goods manufactured.

H Company
Statement of Cost of Goods Manufactured
For the Month End July 31.
Particulars	Amount ($)
Direct materials used	18,500
Direct labor	140,000
Factory overhead applied	40,800
Total current manufacturing costs	199,300
Add: Beginning work-in-process inventory	-
Total manufacturing cost to account for	199,300
Less: Ending work-in-process inventory (4)	135,300
Cost of goods manufactured	64,000

Table (2)

(4) Calculate the ending work-in-process inventory.

$\begin{array}{c}\left(\begin{array}{l}\text{Ending work-in-process }\\ \text{inventory}\end{array}\right)=\left(\begin{array}{l}\text{Total manufacturing cost}\\ -\text{Cost of goods manufactured}\end{array}\right)\\ =\$199,300-\$64,000\\ =135,300\end{array}$

Compute the actual overhead.

Particulars	Amount ($)
Indirect materials used	1,600
Factory utilities	6,510
Factory insurance	1,800
Depreciation expense-plant	3,505
Other factory overhead	6,270
Indirect labor	20,000
Total factory overhead	39,685
Total applied overhead	40,800
Overapplied overhead	1,115

Table (3)

Prepare the schedule of cost of goods sold.

H Company
Statement of Cost of Goods Sold
For the Month Ended July 31.
Particulars	Amount ($)
Finished goods beginning balance
Cost of goods manufactured	64,000
Total goods available for sale	64,000
Finished goods ending balance	16,140
Cost of goods sold	47,860
Overapplied overhead	1,115
Cost of goods sold	48,975

Table (4)

5.

To determine

Prepare income statement.

Explanation of Solution

Prepare income statement.

D Company
Income Statement
For the Month Ended July 31.
Particulars	Amount ($)	Amount ($)
Sales revenue		56,410
Cost of goods sold		46,745
Gross margin		9,665
Advertising expense	2,650
Selling and administrative	6,685
Total Selling and administrative		9,335
Operating income		330

Table (5)

Therefore, the operating income is $330.