Recall that inventory beginning balances were $25,000 for raw materials inventory, $35,000 for work-in-process inventory, and $90,000 for finished goods inventory.

Management of Custom Furniture Company would like to use activity-based costing to allocate overhead costs totaling $1,140,000 rather than one plantwide rate based on direct labor hours. The following estimates are for the activities and related cost drivers identified as having the greatest impact on overhead costs.

Activity	Cost Driver	Estimated Annual Overhead Costs	Estimated Annual Cost Driver Activity
Purchase orders	Number of purchase orders	$260,000	800 orders
Machine setups	Number of setups	360,000	1,000 setups
Machine maintenance	Machine hours	140,000	20,000 machine hours
Misc. production activities	Direct labor hours	380,000	38,000 direct labor hours
Total		$1,140,000

Transactions for the month of May are shown as follows:

Raw materials were purchased during the month for $15,000 on account.

Raw materials totaling $21,000 were placed in production: $3,000 for indirect materials (glue, screws, nails, and the like) and $18,000 for direct materials (wood planks, hardware, etc.).

Timesheets from the direct labor workforce show total costs of $40,000, to be paid the next month.

Production supervisors and other indirect labor working in the factory are owed wages totaling $27,000.

The following costs were incurred related to the factory: building depreciation of $29,000, insurance of $11,000 (originally recorded as prepaid insurance), utilities of $4,000 (to be paid the next month), and maintenance costs of $22,000 (paid immediately).

Manufacturing overhead is applied to products based on the following cost driver activity for the month:

Number of purchase orders	75
Number of machine setups	120
Machine hours	1,850
Direct labor hours	3,240

The following selling costs were incurred: wages of $5,000 (to be paid the next month), building rent of $3,000 (originally recorded as prepaid rent), and advertising totaling $10,000 (to be paid the next month).

The following general and administrative (G&A) costs were incurred: wages of $13,000 (to be paid the next month), equipment depreciation of $6,000, and building rent of $7,000 (originally recorded as prepaid rent).

Completed goods costing $155,000 were transferred out of work-in-process inventory.

Sold goods for $100,000 on account and $90,000 cash.

The goods sold in the previous transaction had a cost of $129,000.

Closed the manufacturing overhead account to cost of goods sold.

Required:

Calculate the predetermined overhead rate for each activity.

Prepare T-accounts for the following accounts: cash, accounts receivable, prepaid insurance, prepaid rent, raw materials inventory, work-in-process inventory, finished goods inventory, accumulated depreciation (building and equipment), accounts payable, wages payable, manufacturing overhead, sales, cost of goods sold, advertising expense (selling), rent expense (selling), wages expense (selling), depreciation expense (G&A), rent expense (G&A), and wages expense (G&A). Enter beginning balances in T-accounts for the inventory accounts (raw materials, work in process, and finished goods).

Prepare a journal entry for each of the transactions 1 through 11, and post each entry to the T-accounts set up in requirement b. Label each entry in the T-accounts by transaction number, and total each T-account.

Is overhead underapplied or overapplied for the month of May? Based on the balance in the manufacturing overhead T-account prepared in requirement c, prepare a journal entry for transaction 12.

Prepare an income statement for the month of May. (Hint: Be sure to include the adjustment made to cost of goods sold in requirement d.)