Because each display unit is a unique design and may require anything from a few hours to a month or more to complete, Brinkerhoff, Inc. uses a job-order costing system. Overhead in the fabrication shop is charged to display units on the basis of direct labor cost. The company’s predetermined overhead rate for the year is based on a cost formula that estimated $99,000 in manufacturing overhead for an estimated allocation base of $110,000 direct labor dollars. The following transactions were recorded during the year:
a.Raw materials, such as wood, paints, and metal sheeting, were purchased on account, $82,000. b.Raw materials were issued to production, $93,000; $5,600 of this amount was for indirect materials. c.Payroll costs incurred and paid: direct labor, $125,000; indirect labor, $49,500; and selling and administrative salaries, $71,000. d.Fabrication shop utilities costs incurred, $14,000.
e.Depreciation recorded for the year, $23,000 ($4,200 on selling and administrative assets; $18,800 on fabrication shop assets). f.Prepaid insurance expired, $4,600 ($3,400 related to fabrication shop operations, and $1,200 related to selling and administrative activities). g.Shipping expenses incurred, $41,000.
h.Other manufacturing overhead costs incurred, $17,800 (credit Accounts Payable). i.Manufacturing overhead was applied to production. Overhead is applied on the basis of direct labor cost. j.Display units that cost $281,000 to produce according to their job cost sheets were completed. k.Sales for the year totaled $530,000 and were all on account. The total cost to produce these display units was $250,000 according to their job cost sheets. l.Collections on account from customers, $415,000.
m.Payments on account to suppliers, $141,000.
1.Prepare a T-account for each account on the company’s balance sheet, and enter the beginning balances. 2.Make entries directly into the T-accounts for transactions (a) through (m). Create new T-accounts as needed. Determine an ending balance for each T-account. 3.Was 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. 4.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 T-accounts.)