PROBLEM TWO

Mr. Snell, 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 $ 17,750

Raw Materials Inventory $ 2,250

Supplies Inventory $ 750 Stockholders Equity

Work in Process Inventory $ ???? Common Stock ???

Finished Goods Inventory $ 0 Retained Earnings $1,000

The subsidiary ledgers for work in process are as follows:

Job Materials Labor Overhead

A-3 $ 750 $1,100 $ 660

A-4 900 650 390

A-5 325 700 420

Other items of importance are:

1. Two additional jobs were started: A6, A7.
2. $2,725 of raw materials were purchased on account during the month
3. Raw materials listed were used; A-3 $280, A-4 $350. A-5 $520, A-6 $375, A-7 $250.
4. Supplies of $750 were purchased for cash, while $500 were used.
5. Direct labor was A-3 $750, A-4 $1,300. A-5 $550, A-6 $490, A-7 $370.
6. Indirect labor was $2,000.
7. Overhead is applied to production; overhead is applied as 60% of direct labor cost.
8. General administrative expenses for the month, $3,525 were paid in cash.
9. Jobs A-3, A-5, and A-7 were finished.
10. A-3 was sold for $6,125 for cash and A-7 was sold for $1,750 on accounr.

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. Prepare all of the journal entries and T-charts 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. Snell studied the plan and figured cost would be:

Lumber $ 600

Finishing materials 75

Labor 640

Overhead 384

Total $1,699

With markup of 15%, the price would be $1,954.

Mrs. Smith was incensed stating that a competitor down the street, Mr. Haness, quoted a price of $1,600. It is true that Snell does not want to lay off workers during slow times. What recommendation would you make? Why? AN EXECUTIVE SUMMARY IS REQUIRED FOR THIS PROBLEM.