PROBLEM TWO

Mr. Radiance, a master cabinetmaker, owns and operates a custom-made cabinetry shop. He uses a normal costing system and applies overhead on the basis of direct labor cost. At the beginning of September, he had no outstanding debt and the following balances were in the general ledger:

Cash $ 16,890

Raw Materials Inventory $ 2,150

Supplies Inventory $ 620

Work in Process Inventory $ ????

Finished Goods Inventory $ 0 Stockholders Equity???

The subsidiary ledgers for work in process are as follows:

Job Materials Labor Overhead

A-3 $ 750 $1,100 $ 550

A-4 900 650 325

A-5 325 700 350

-Other items of importance are:

-$1,675 of raw materials were purchased during the month

-Raw materials listed were used; A-3 $280, A-4 $350. A-5 $520, A-6 $375, A-7 $250.

-Supplies of $580 were purchased, while $490 were used.

-Direct labor was $3,460; A-3 $750, A-4 $1,300. A-5 $550, A-6 $490, A-7 $370.

-Indirect labor was $2,000.

-Overhead is applied to production; overhead is applied as 50% of direct labor cost.

-General administrative expenses for the month were $3,420.

-Jobs A-3, A-5, and A-6 were finished. A-3 and A-5 were sold for $6,125, and $1,750, respectively.

REQUIRED:

1) Prepare the balance sheet for August 31.

2) Prepare job cost sheets for all jobs A-3, A-4, A-5, A-6, A-7.

3) Show in a ledger the transactions for September.

4) Prepare cost of goods manufactured statement for September.

5) Prepare the cost of goods sold statement for September.

6) Close the over-under applied overhead to the cost of goods sold for September.

7) Prepare the income statement for September.

8) Prepare a statement of retained earnings.

9) Prepare a balance sheet for September 30.

10) Without regard to the line 6 above, assume that the over or under applied overhead is MATERIAL. Prorate the balance to the appropriate accounts.

CONSIDER THE FOLLOWING SITUATION:

Mrs. Smith had stopped by one day and asked for a price on some cabinets. Radiance studied the plan and figured cost would be:

Lumber $ 590

Finishing materials 75

Labor 640

Overhead 320

Total $1,625

With markup of 15%, the price would be $1,900.

Mrs. Smith was incensed stating that a competitor down the street, Ms. Jones, quoted a price of $1,600. It is true that Radiance does not want to lay off workers during slow times. What recommendation would you make? Why?