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Chapter 3

Job-Order Costing: Cost Flows and External Reporting

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i.

Required:

1. Prepare journal entries to record the transactions for the year. 2. Prepare T-accounts for each inventory account, Manufacturing Overhead, and Cost of Goods Sold.

Post relevant data from your journal entries to these T-accounts (don't forget to enter the beginning balances in your inventory accounts). Compute an ending balance in each account. 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. 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.) PROBLEM 317 Cost Flows; T-Accounts; Income Statement L03-2, LO3-3, LO3-4 Supreme Videos, Inc., produces short musical videos for sale to retail outlets. The company's balance sheet accounts as of January 1, are given below.

g. Prepaid insurance expired during the year, $7,000 (80% related to production of videos, and 20%

related to marketing and administrative activities). h. Miscellaneous marketing and administrative expenses incurred, $8,600.

Studio (manufacturing) overhead was applied to videos in production. The company used 7,250 camera-hours during the year. Videos that cost $550,000 to produce according to their job cost sheets were transferred to the finished

videos warehouse to await sale and shipment. k. Sales for the year totaled $925,000 and were all on account. The total cost to produce these videos

according to their job cost sheets was $600,000. 1. Collections from customers during the year totaled $850,000. m. Payments to suppliers on account during the year, $500,000; payments to employees for salaries and

wages, $285,000.

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Supreme Videos, Inc:...::::::

Balance Sheet -

January 2'::

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Assets

Required: 1. Prepare a T-account for each account on the company's balance sheet and enter the beginning

balances. 2. Record the transactions directly into the T-accounts. Prepare new T-accounts as needed. Key your

entries to the letters (a) through (m) above. Compute the ending balance in each account. Is the Studio (manufacturing) Overhead account underapplied or overapplied for the year? Make an entry in the T-accounts to close any balance in the Studio Overhead account to Cost of Goods Sold. Prepare a schedule of cost of goods manufactured. If done correctly, the cost of goods manufactured from your schedule should agree with which of the above transactions? Prepare a schedule of cost of goods sold. If done correctly, the unadjusted cost of goods sold from

your schedule should agree with which of the above transactions? 6. Prepare an income statement for the year.

Current assets:

Cash Accounts receivable ....... Inventories:

Raw materials (film, costumes) Videos in process

Finished videos awaiting sale Prepaid insurance ...... Total current assets Studio and equipment ... Less accumulated depreciation .... Total assets .......

$ 63,000

102,000

$ 30,000 45,000 81,000

wer

156,000

9,000 330,000

in connect BUILDING YOUR SKILLS

730,000 210,000

520,000 $850,000

$ 160,000

Liabilities and Stockholders' Equity Accounts payable ...... Capital stock

$420,000 Retained earnings

270,000 Total liabilities and stockholders' equity ............

690,000 $850,000

ETHICS CHALLENGE LO3-4 Terri Ronsin had recently been transferred to the Home Security Systems Division of National Home Products. Shortly after taking over her new position as divisional controller, she was asked to develop the division's predetermined overhead rate for the upcoming year. The accuracy of the rate is important because it is used throughout the year and any underapplied or overapplied overhead is closed out to Cost of Goods Sold at the end of the year. National Home Products uses direct labor-hours in all of its divisions as the allocation base for manufacturing overhead.

To compute the predetermined overhead rate, Terri divided her estimate of the total manufacturing overhead for the coming year by the production manager's estimate of the total direct labor-hours for the coming year. She took her computations to the division's general manager for approval but was quite sur prised when he suggested a modification in the allocation base. Her conversation with the general manager of the Home Security Systems Division, Harry Irving, went like this:

Because the videos differ in length and in complexity of production, the company uses a job-order costing system to determine the cost of each video produced. Studio (manufacturing) overhead is charged to videos on the basis of camera-hours of activity. The company's predetermined overhead rate for the year is based on a cost formula that estimated $280,000 in manufacturing overhead for an estimated allocation base of 7,000 camera-hours. The following transactions occurred during the year: a. Film, costumes, and similar raw materials purchased on account, $185,000. b. Film, costumes, and other raw materials used in production, $200,000 (85% of this material was

considered direct to the videos in production, and the other 15% was considered indirect). Utility costs incurred in the production studio, $72,000. Depreciation recorded on the studio, cameras, and other equipment, $84,000. Three-fourths of this depreciation related to production of the videos, and the remainder related to equipment used in

marketing and administration. e. Advertising expense incurred, $130,000. f. Costs for salaries and wages were incurred as follows:

Ronsin: Here are my calculations for next year's predetermined overhead rate. If you approve, we can

enter the rate into the computer on January 1 and be up and running in the job-order costing system

right away this year. Irving: Thanks for coming up with the calculations so quickly, and they look just fine. There is, however,

one slight modification I would like to see. Your estimate of the total direct labor-hours for the year is

440,000 hours. How about cutting that to about 420,000 hours? Ronsin: I don't know if I can do that. The production manager says she will need about 440,000 direct

labor-hours to meet the sales projections for the year. Besides, there are going to be over 430,000

direct labor-hours during the current year and sales are projected to be higher next year. Irving: Teri, I know all of that. I would still like to reduce the direct labor-hours in the allocation base to

something like 420,000 hours. You probably don't know that I had an agreement with your predecessor as divisional controller to shave 5% or so off the estimated direct labor-hours every year. That way, we kept a reserve that usually resulted in a big boost to net operating income at the end of the year in December. We called it our Christmas bonus. Corporate headquarters always seemed to be pleased that we could pull off such a miracle at the end of the year. This system has worked well for many years, and I don't want to change it now.

Direct labor (actors and directors) ..... Indirect labor (carpenters to build sets, costume designers, and so forth) ........

$82,000 $110,000 $95,000

Administrative salaries

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