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Magazine Chapter 17: Q17-36PGB (page 953)
Meadow Construction, Inc. is a home builder in Arizona. Meadow uses a job order costing system in which each house is a job. Because it constructs houses, the company uses an account titled Construction Overhead. The company applies overhead based on estimated direct labor costs. For the year, it estimated construction overhead of \(1,150,000 and total direct labor costs of \)5,750,000. The following events occurred during August:
a. Purchased materials on account, \(450,000.
b. Requisitioned direct materials and used direct labor in construction. Recorded the materials requisitioned.
Direct material | Direct Labor | |
House 402 | \)52,000 | \(47,000 |
House 403 | 67,000 | 36,000 |
House 404 | 63,000 | 54,000 |
House 405 | 88,000 | 52,000 |
c. The company incurred total wages of \)240,000. Use the data from Item b to
assign the wages. Wages are not yet paid.
d. Depreciation of construction equipment, \(6,300.
e. Other overhead costs incurred: Equipment rentals paid in cash, \)40,000; Worker liability insurance expired, \(5,000.
f. Allocated overhead to jobs.
g. Houses completed: 402, 404.
h. House sold on account: 404 for \)250,000.
Requirements
1. Calculate Meadow鈥檚 predetermined overhead allocation rate for the year.
2. Prepare journal entries to record the events in the general journal.
3. Open T-accounts for Work-in-Process Inventory and Finished Goods Inventory.
Post the appropriate entries to these accounts, identifying each entry by letter.
Determine the ending account balances, assuming that the beginning balances
were zero.
4. Add the costs of the unfinished houses, and show that this total amount equals the ending balance in the Work-in-Process Inventory account.
5. Add the cost of the completed house that has not yet been sold, and show that this equals the ending balance in Finished Goods Inventory.
6. Compute gross profit on the house that was sold. What costs must gross profit
cover for Meadow Construction?
Short Answer
1. The predetermined overhead allocation rate of the company is $0.20
2. Journal entries to record events in the general journal
Date | Particulars | Debit ($) | Credit ($) |
A | Raw material inventory | 450,000 | |
Accounts payable | 450,000 | ||
B | Work-in-process inventory (52,000+67,000+63,000+88,000) | 270,000 | |
Raw material inventory | 270,000 | ||
C | Work-in-process inventory (47,000+36,000+54,000+52,000) | 189,000 | |
Manufacturing overhead | 51,000 | ||
Wages payable | 240,000 | ||
D | Manufacturing overhead | 6,300 | |
Accumulated depreciation | 6,300 | ||
E | Manufacturing overhead | 45,000 | |
Cash | 40,000 | ||
Prepaid insurance | 5,000 | ||
F | Work-in-process inventory | 37,800 | |
Manufacturing overhead | 37,800 | ||
G | Finished goods inventory | 236,200 | |
Work-in-process inventory | 236,200 | ||
H | Account receivable | 250,000 | |
Sales | 250,000 | ||
I | Cost of goods sold | 127,800 | |
Finished goods inventory (63,000+54,000+(54,000 x 0.20) | 127,800 |
3. T-Account
Work-in-process inventory
B | 270,000 | G | 236,200 |
C | 189,000 | ||
F | 37,800 | ||
Balance | 260,600 |
Finished goods inventory
G | 236,200 | I | 127,800 |
Balance | 108,400 |
4. The total cost of the unfinished house is $260,600
5. The total cost of the completed house that has not been sold is $108,400.
6. Gross profit on the house that was sold is $122,200. The gross profit covers the cost of production (direct material, direct labor, and the manufacturing overhead)
Step by step solution
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