Comprehensive Problem [LO1, LO2, LO4, LO5, LO6, LO7]

Sovereign Millwork, Ltd., produces reproductions of antique residential moldings at a plant located in Manchester, England. Because there are hundreds of products, some of which are made only to order, the company uses a job-order costing system. On July 1, the start of the company’s fiscal year, inventory account balances were as follows:

The company applies overhead cost to jobs on the basis of machine-hours. Its predetermined overhead rate for the fiscal year starting July 1 was based on a cost formula that estimated £99,000 of manufacturing overhead for an estimated activity level of 45,000 machine-hours. During the year, the following transactions were completed:

a. Raw materials purchased on account, £160,000.

b. Raw materials requisitioned for use in production, £140,000 (materials costing £120,000 were chargeable directly to jobs; the remaining materials were indirect).

c. Costs for employee services were incurred as follows:

d. Prepaid insurance expired during the year, £18,000 (£13,000 of this amount related to factory operations, and the remainder related to selling and administrative activities).

e. Utility costs incurred in the factory, £10,000.

f. Advertising c osts i ncurred, £15, 000.
g. Depreciation recorded on equipment, £25,000. (£20,000 of this amount was on equipment used in factory operations; the remaining £5,000 was on equipment used in selling and administrative a ctivities.)
h. Manufacturing overhead cost was applied to jobs, £?. (The company recorded 50,000 machine-hours of operating time during the year.)
i. Goods that had cost £310,000 to manufacture according to their job cost sheets were completed.
j. Sales (all on account) to customers during the year totaled £498,000. These goods had cost £308,000 to manufacture according to their job cost sheets.
Required:
1. Prepare journal entries to record the transactions for the year.
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 a nd T-accounts you ha ve pr epared.)

Transcribed Image Text:

Raw Materials ... Work in Process Finished Goods 10,000 4,000 8,000