Craftsman manufactures customized household furnishings. The company uses a perp
ID: 2543728 • Letter: C
Question
Craftsman manufactures customized household furnishings. The company uses a perpetual inventory system and has a highly labour intensive production process, so it assigns manufacturing overhead based on direct labour cost.
Craftsman predetermined overhead application rate for 2012 was computed from the following data:
Total estimated factory overhead $480,000
Total estimated direct labour cost $800,000
The following events occurred during May 2012.
i) Purchased materials on account, $405,000
ii) Incurred manufacturing wages of $111,600
iii) Requisitioned direct materials and used direct labour in manufacturing
Direct Materials Direct Labour
$ $
Job 101 41,320 56,800
Job 102 62,100 66,000
Job 103 14,800 28,700
Job 104 19,200 21,000
iv) Issued indirect materials to production, $6,600
v) Charged indirect manufacturing wages to production, $27,900
vi) Other manufacturing overhead costs incurred on units 101 to 104 amounted to $29,800
vii) Allocated overheads to jobs at the predetermined rate
viii) Units completed: 101, 103 & 104
ix) Sold units 101 & 104 (billed customers at a mark-up of 45% on cost)
Required:
(a) Compute Craftsman’s predetermined manufacturing overhead rate for 2012.
b) State the journal entries necessary to record the above transactions in the general journal.
(c) Calculate the manufacturing overhead variance for Craftsman and state the journal entries necessary to dispose of the variance.
(d) What is balance on the Cost of Goods Sold account after the adjustment
(e) Open T-accounts for Work in Process Inventory and Finished Goods Inventory. Post the appropriate entries to these accounts, identifying each entry by number. Determine the ending balances, assuming that the beginning balances were zero.
Explanation / Answer
a. Predetermined manufacturing overhead rate = Total estimated factory overhead/Total estimated direct labor cost = $480000/$800000 = 60% of direct labor cost
b. Journal entries:
Note: Since the direct and indirect labor used is more than the manufacturing wages assigned, it is credited to wages expense to extent incurred and additional may be credited to wages payable.
Working:
c. Manufacturing overhead variance = Overhead incurred - Overhead applied = $64300 - $103500 = $39200 Favorable
d. Cost of goods sold (adjusted) = $185000 - $39200 = $145800
e.
Transaction Account Titles and Explanation Debit Credit i Raw Materials inventory 405000 Accounts Payable 405000 (To record materials purchased on account) ii Wages expense 111600 Wages payable 111600 (To record manufacturing wages incurred) iii Work in process inventory 309920 Raw Materials inventory 137420 Wages expense/payable 172500 (To record materials and direct labor used) iv Manufacturing overheads 6600 Raw Materials inventory 6600 (To record indirect materials used) v Manufacturing overheads 27900 Wages expense/payable 27900 (To record indirect labor assigned) vi Manufacturing overheads 29800 Cash/Accounts payable 29800 (To record other manufacturing overheads incurred) vii Work in process inventory 103500 Manufacturing overheads (60% x $172500) 103500 (To record manufacturing overhead allocated) viii Finished goods inventory 245720 Work in process inventory 245720 (To record cost of jobs completed and transferred) ix Accounts Receivable 268250 Sales Revenue 268250 (To record sale on account) ix Cost of goods sold 185000 Finished goods inventory 185000 (To record cost of sales)