Sofas Company Pte Ltd (SC)

is a manufacturer of ergonomic sofas for homes. The company adopts a first-in-first-out inventory valuation method and a perpetual inventory system to manage its inventories. The companys financial year-end is on 31 December. SC calculates its product costs using a job-order costing system, and assigns manufacturing overheads based on machine hours.

The company accountant, who had been with SC for a long time, prepared the account balances, as tabulated below, before her retirement to take care of her young grandchildren. You are the new accountant who was recruited to finalise the accounts of the company. All references to the financial year refer to the financial year of 2012. All accounts have normal balances unless otherwise indicated.

Accounts Payable ("AP") Accounts Receivable ("AR") Accumulated Depreciation Allowance for Impairment of AR Borrowings

Cash Cost of Goods Sold ("COGS") Depreciation Finished Goods Inventory Insurance Expenses Interest Expense Interest Payable Manufacturing Overheads ("MOH")(credit balance) Prepaid Rent Property, Plant and Equipment ("PPE") Raw Materials Inventory (all direct materials) Retained Earnings Salaries Sales Discounts Sales Returns & Allowances Sales Revenue Share Capital Utility Expenses Work in Process Inventory

Balance as at 31 December 2012 $

40,000

80,000 370,000 5,000 200,000 370,381 1,008,575 20,000 97,975 15,000 8,000 500 137,475 100,000 1,000,000 11,000 513,356 200,000 3,000 20,000 1,273,000 500,000 60,000 45,400

AC1104

S11 - 14

After extensive work on the accounts of SC, you gathered the following information relating to possible omissions or errors:

(1) The balances of selected accounts as at 31 December 2011 are tabled below. All accounts have normal balances.

Accounts Payable ("AP") Raw Materials Inventory (all direct materials) Work in Process Inventory Finished Goods Inventory

Balance as at 31 December 2011 $

50,000 11,000 40,000 45,000

(2) Budgeted manufacturing overhead was $350,000 per annum. Budgeted and actual machine hours were 10,000 hours and 10,500 hours respectively per annum. Budgeted and actual direct labour hours were 20,000 hours and 21,000 hours respectively per annum. Actual labour rate is $12 per hour.

(3) Accounts payable was used by SC solely for raw material purchases and payments. All raw material purchases are on credit and these purchases are incurred evenly throughout the year. Suppliers invoice SC immediately when the raw materials are purchased by SC. SC always pays these suppliers 1 month after invoicing. Out of all raw materials, the company returned $9,000 of raw materials to suppliers in January 2012 as those raw materials were of inferior quality. Out of all the raw materials purchased in the financial year, 5% are indirect materials.

(4) On 15 December 2012, a customer discovered that 5 sofas purchased on account (total revenue: $1,000, total cost: $800) were of the wrong colour. The customer intended to return these sofas to the company, but kept the units after SC sent a $100 credit note to compensate the customer. No journal entries were made for the credit note of $100.

(5) SC bought a new machine to manufacture a range of recliner sofas during the year. The purchase of the new machine was recorded correctly. However, the depreciation for the year of $41,000 was not recorded. The remaining depreciation already recorded was related to administrative equipment.

(6) In December 2012, SC delivered a batch of sofas (total cost: $5,000) to a consignee at a 20% mark-up. At the end of the financial year, none of the sofas were sold by the consignee. SC has accounted for the consignment sale as a normal sale on account.

AC1104 S11 - 15

(7) The borrowings as at 31 December 2012 relate to a 3-year working capital borrowing that finances raw material purchases, labour payments and overheads used by the company to manufacture the sofas. SC took out a $300,000 borrowing on 31 October 2011 and the borrowing was repayable in three equal annual instalments beginning 31 October 2012. The borrowing has an interest rate of 3% per annum payable semi-annually in arrears on every 31 October and 30 April. There is no other borrowing. (Hint: Interest expense is not a MOH.)

(8) SC pays annual rent of $100,000 in advance every 1st January. $80,000 of the annual rent is incurred to rent space for factory operations, while the rest is incurred to rent a warehouse to store completed sofas. SC has no other rented space.

(9) On 31 December 2012, SC received invoices for December 2012's training expenses for its factory employees and utility expenses for December 2012. The training expenses totalled $3,000, while the utility expenses totalled $20,000. 70% of the utility expenses are for the factory while the rest is for the office. No journal entries had been made for the training expenses and the utility bills.

Required

(i) Prepare SCs schedule of cost of goods manufactured for the financial year ended 31 December 2012.

(ii) Using the information provided in points (4) to (9) above, prepare the adjusting and correcting journal entries for the financial year ended 31 December 2012. If no adjusting or correcting journal entry is required for a particular point, explain the reason. No narration or dates are required.

(iii) Was the manufacturing overhead under or over-applied? Write a journal entry to close the under/over-applied manufacturing overhead to the cost of goods sold.

(iv) Prepare SCs income statement for the year ended 31 December 2012.

(v) SC chose machine hours as the base for assigning overhead to jobs. Besides machine hours, name an alternative cost driver that the company could use as the base for assigning overhead. State and explain two (2) factors that the company should consider when selecting the cost driver.