Question: Ravsten Company uses a job-order costing system. On January 1, the beginning of the current year, the company's inventory balances were as follows:
Raw materials . . . . . . . . . $16,000
Work in process . . . . . . . . $10,000
Finished goods . . . . . . . . $30,000
The company applies overhead cost to jobs on the basis of machine-hours. For the current year, the company estimated that it would work 36,000 machine-hours and incur $153,000 in manufacturing overhead cost. The following transactions were recorded for the year:
a. Raw materials purchased on account, $200,000.
b. Raw materials requisitioned for use in production, $190,000 (80% direct and 20% indirect).
c. The following costs were incurred for employee services:
Direct labor . . . . . . . . . . . . . . . . $160,000
Indirect labor . . . . . . . . . . . . . . . $27,000
Sales commissions . . . . . . . . . . $36,000
Administrative salaries . . . . . . . $80,000
d. Heat, power, and water costs incurred in the factory, $42,000.
e. Prepaid insurance expired during the year, $10,000 (90% relates to factory operations, and 10% relates to selling and administrative activities).
f. Advertising costs incurred, $50,000.
g. Depreciation recorded for the year, $60,000 (85% relates to factory operations, and 15% relates to selling and administrative activities).
h. Manufacturing overhead cost was applied to production. The company recorded 40,000 machine-hours for the year.
i. Goods that cost $480,000 to manufacture according to their job cost sheets were transferred to the finished goods warehouse.
j. Sales for the year totaled $700,000 and were all on account. The total cost to manufacture these goods according to their job cost sheets was $475,000.
Required: 1. Prepare journal entries to record the transactions given above.
2. Prepare T-accounts for inventories, Manufacturing Overhead, and Cost of Goods Sold. Post relevant data from your journal entries to these T-accounts (don't forget to enter the opening balances in your inventory accounts). Compute an ending balance in each account.
3. Is Manufacturing Overhead underapplied or overapplied for the year? Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.
4. Prepare an income statement for the year. (Do not prepare a schedule of cost of goods manufactured; all of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.