Froya Fabrikker A/S of Bergen, Norway, is a small company that manufactures speciality heavy equipment for use in North Sea oil fields. The company uses a job order costing system that applies manufacturing overhead cost to jobs on the basis of direct labot hours. Its predetermined overhead role was based on a cost formula that estimated $378,000 of manufacturing overhead for an estimated allocation base of 900 direct labor-hours. The following transactions took place during the year 10 Dom 100 Raw materials purchased on account, $285,000. D. Raw materials used in production (all direct moteris, 5270,000 c Utility bilis incurred on account. 576.000 (85% related to factory operations, and the remainder related to pering ond administrativo activities) d. Accrued salary and wage costs Doc Direct labor (950 hours) Indirect labor Selling and administrative salaries $315, $107.00 5 195.000 .
Rounce e. Maintenance costs incurred on account in the factory, 571000 Advertising costs incurred on account $153,000 Depreciation was recorded for the year $89.000 (70% related to factory equipment, and the remainder related to selling and administrative equipment) n. Rental cost incurred on account. $114.000 (75% related to factory facilities, and the remainder related to selling and administrativo facilities) Manufacturing overhead cost was applied to jobs, $_2 Cost of goods manufactured for the year $940.000 k Sales for the year fall on account totaled $2,050,000. Those goods cost $970.000 according to their job cost sheets: The balances in the inventory accounts at the beginning of the year were Raw Materials $ 47,000 Work in Process $ 38.000 Finished Goods $77.00 Required: 1. Prepare journal entries to record the preceding transactions
The Correct Answer and Explanation is :
roya Fabrikker A/S employs a job order costing system, allocating manufacturing overhead based on direct labor hours.he predetermined overhead rate is calculated by dividing the estimated manufacturing overhead by the estimated direct labor hours:
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his results in a predetermined overhead rate of $420 per direct labor hour.
The following journal entries record the transactions for the year:
- Purchase of Raw Materials on Account o record the purchase of raw materials: Account Debit ($) Credit ($) Raw Materials Inventory 285,000 Accounts Payable 285,000
- Usage of Raw Materials in Production ll raw materials used are direct materials: Account Debit ($) Credit ($) Work in Process (WIP) 270,000 Raw Materials Inventory 270,000
- Utility Bills Incurred tility costs are allocated between factory operations (85%) and selling and administrative activities (15%): Account Debit ($) Credit ($) Manufacturing Overhead 64,600 Utilities Expense 11,400 Accounts Payable 76,000
- Accrued Salary and Wage Costs ecording direct labor, indirect labor, and selling and administrative salaries: Account Debit ($) Credit ($) Work in Process (WIP) 315,000 Manufacturing Overhead 107,000 Salaries Expense 195,000 Salaries and Wages Payable 617,000
- Factory Maintenance Costs Incurred o record maintenance costs: Account Debit ($) Credit ($) Manufacturing Overhead 71,000 Accounts Payable 71,000
- Advertising Costs Incurred o record advertising expenses: Account Debit ($) Credit ($) Advertising Expense 153,000 Accounts Payable 153,000
- Depreciation Recorded for the Year epreciation is allocated between factory equipment (70%) and selling and administrative equipment (30%): Account Debit ($) Credit ($) Manufacturing Overhead 62,300 Depreciation Expense 26,700 Accumulated Depreciation 89,000
- Rental Costs Incurred ental costs are allocated between factory facilities (75%) and selling and administrative facilities (25%): Account Debit ($) Credit ($) Manufacturing Overhead 85,500 Rent Expense 28,500 Accounts Payable 114,000
- Application of Manufacturing Overhead to Jobs verhead is applied based on actual direct labor hours (950 hours) at the predetermined rate of $420 per hour: Account Debit ($) Credit ($) Work in Process (WIP) 399,000 Manufacturing Overhead 399,000
- Cost of Goods Manufactured o record the completion of jobs: Account Debit ($) Credit ($) Finished Goods Inventory 940,000 Work in Process (WIP) 940,000
- Sales on Account ecording sales revenue and the corresponding cost of goods sold: Account Debit ($) Credit ($) Accounts Receivable 2,050,000 Sales Revenue 2,050,000 Account Debit ($) Credit ($) ————————- ———– ———— Cost of Goods Sold 970,000 Finished Goods Inventory 970,000 Explanation:
hese journal entries systematically capture the flow of costs in a job order costing system:
- Purchasing and Using Materials: aw materials are initially recorded in the Raw Materials Inventory account. When these materials are used in production, their costs are transferred to the Work in Process (WIP) account.
- Labor Costs: irect labor costs are added to WIP, while indirect labor costs are allocated to Manufacturing Overhead.
- Overhead Costs: ctual overhead costs (such as utilities, maintenance, depreciation, and rent) are accumulated in the Manufacturing Overhead account. This account is later applied to WIP based on the predetermined overhead rate.
- Applying Overhead: verhead is applied to jobs using the predetermined rate multiplied by the actual direct labor hours incurred.
- Completion and Sale of Goods: pon completion, the total