The Sierra Inc uses job order costing system. The company uses machine hours to a

The Sierra Inc uses job order costing system. The company uses machine hours to apply overhead cost to jobs. At the beginning of 2016, the company estimated that 150,000 machine hours would be worked and $900,000 overhead cost would be incurred during 2016.

The balances of raw materials, work in process (WIP), and finished goods at the beginning of 2016 were as follows:

Raw materials

40,000

Work in process

30,000

Finished goods

60,000

The Fine manufacturing company recorded the following transactions during 2016:

Raw materials purchased on account, $820,000.

Raw materials were requisitioned for use in production, $760,000 ($720,000 direct materials and $40,000 indirect materials).

Direct labor, $150,000; indirect labor, $220,000; sales commission, $180,000; and administrative salaries, $400,000.

Sales travel costs were $34,000.

Utility costs incurred in the factory, $86,000.

Advertising expenses were $360,000.

Depreciation for the year was $700,000 ($560,000 relates to factory and $140,000 relates to selling and administrative activities).

Insurance expired during the year, $20,000 ($14,000 relates to factory operations and $6,000 relates to selling and administrative activities).

Fine manufacturing company worked 160,000 machine hours. Manufacturing overhead was applied to production.

Goods costing $1,800,000 were completed during the year.

The goods costing $1,740,000 were sold to customers for $3,000,000.

Required:

Prepare journal entries, T-accounts and income statement (Links to an external site.)Links to an external site. from the above information.

Expert Answer

Preparation of journal entries:

No.	Account Head	Debit	Credit
a.	Raw Materials	820,000
	Accounts Payable		820,000

b.	Work in Process	720,000
	Manufacturing Overhead	40,000
	Raw Materials		760,000

c.	Work in Process	150,000
	Manufacturing Overheads	220,000
	Sales Commission Expenses	180,000
	Administrative Salaries Expenses	400,000
	Salaries and Wages Payable		950,000

d.	Sales travel expenses	34,000
	Accounts Payable		34,000

e.	Manufacturing Overheads	86,000
	Accounts Payable		86,000

f.	Advertising Expenses	360,000
	Accounts Payable		360,000

g.	Manufacturing Overheads	560,000
	Depreciation Expenses	140,000
	Accumulated Depreciation		700,000

h.	Manufacturing Overheads	14,000
	Insurance Expenses	6,000
	Prepaid Insurance		20,000

i.	Work in Process	960,000
	Manufacturing Overhead		960,000
	(Note 1)

j.	Finished Goods	1,800,000
	Work in Process		1,800,000

k.	Accounts Receivable	3,000,000
	Sales		3,000,000

	Cost of goods sold	1,740,000
	Finished Goods		1,740,000

Note 1:

Manufacturing overhead is applied to production by multiplying actual direct labor or machine hours worked during the year and predetermined overhead rate computed at the beginning of the year. It is shown as follows:

Predetermined Overhead Rate = (Estimated Manufacturing Overhead cost / Estimated total units in the allocation base)

Predetermined Overhead rate = $900,000 / 150,000 machine hours

Predetermined Overhead rate = $6 per machine hour

Manufacturing overhead applied to production = Actual machine hours * Predetermined overhead rate

Manufacturing overhead applied to production = 160,000 hours * $6 per hour

Manufacturing overhead applied to production = $960,000

T-Accounts:

Accounts Receivable		Raw Materials		Finished Goods
(k) 3,000,000		Bal. 40,000	(b) 760,000	Bal. 60,000	(k) 1,740,000
		(a) 820,000		(j) 1,800,000

Work in Process		Accounts Payable		Manufacturing Overhead
Bal. 30,000	(j) 1,800,000		(a) 820,000	(b) 40,000	(i) 960,000
(b) 720,000			(d) 34,000	© 220,000
© 150,000			€ 86,000	€ 86,000
(i) 960,000			(f) 360,000	(g) 560,000
				(h) 14,000

Prepaid Insurance		Accumulated Depreciation		Salaries and Wages Payable
	(h) 20,000		(g) 700,000		© 950,000

Sales		Administrative Salary Expenses		Sales Commission Expense
	(k) 3,000,000	© 400,000		© 180,000

Advertising Expense		Depreciation Expense		Sales Travel Expense
(f) 360,000		(g) 140,000		(h) 34,000

Cost of goods Sold		Insurance Expense
(k) 1,740,000		(d) 6,000

Income Statement:

Fine Manufacturing Company
Income Statement
For the Year Ended December 31, 2016
Sales		3,000,000
Less: Cost of goods sold*		1,700,000
Gross Profit		1,300,000
Less: Selling and administrative expense:
Commission Expense	180,000
Administrative Salaries Expense	400,000
Sales Travel Expense	34,000
Advertising Expense	360,000
Depreciation Expenses	140,000
Insurance Expenses	6,000	1,120,000
Net Operating Income		180,000

*Cost of goods sold = $1,740,000 – $40,000 over applies manufacturing overheads

The Sierra Inc uses job order costing system. The company uses machine hours to a

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