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:
a.
Raw materials purchased on account, $820,000.
b.
Raw materials were requisitioned for use in production, $760,000 ($720,000 direct materials and $40,000 indirect materials).
c.
Direct labor, $150,000; indirect labor, $220,000; sales commission, $180,000; and administrative salaries, $400,000.
d.
Sales travel costs were $34,000.
e.
Utility costs incurred in the factory, $86,000.
f.
Advertising expenses were $360,000.
g.
Depreciation for the year was $700,000 ($560,000 relates to factory and $140,000 relates to selling and administrative activities).
h.
Insurance expired during the year, $20,000 ($14,000 relates to factory operations and $6,000 relates to selling and administrative activities).
i.
Fine manufacturing company worked 160,000 machine hours. Manufacturing overhead was applied to production.
j.
Goods costing $1,800,000 were completed during the year.
k.
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

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